Buying an Investment Property - Understanding Escrow

One formal definition of escrow describes it as "aconfirmed and documents are signed. It pays to
deposit of funds or other instruments by one partyunderstand the benefits of different kinds of
for the delivery to another party upon completion ofmortgages.
a particular condition or event." Escrow is aWith a fixed-rate mortgage, the interest rate is
complicated process that intimidates many buyers,locked in. This mortgage may be suitable for an
but it's intended to protect both you and the personowner who intends to keep the property for a long
from whom you are buying the house. It's importanttime, as it protects the home owner against interest
to ask questions if you don't understand what israte increases and the payment is a constant
being done or why it is being done a certain way.amount. However, the interest rate will be higher
The way escrow is carried out depends on wherethan for other types of mortgages. With an
you live. In some states, escrow companies do theadjustable-rate mortgage, the interest rate and the
paperwork and transfer the funds. In others, realpayment can go up or down according to the
estate agents and lawyers handle the paperwork andprevailing interest rates. This mortgage allows the
the delivery of funds and title. Regardless of thebuyer to benefit when interest rates are low, but it
players involved, the functions are the same. Therealso exposes the buyer to the risk of escalating
are three main activities that are going on at therates.
same time during escrow - getting the houseThe fixed-rate adjustable mortgage has a fixed rate
inspection, obtaining the mortgage, and handling thefor certain time, anything from six months to five
escrow paperwork.years. Then the rate adjusts, along with the
The house inspectionpayments. This can be a money-saving option for a
The house inspection, from the buyer's perspective,buyer who intends to flip the house within a year or
is both a protection and a negotiating tool. If thetwo, because the initial interest rate will be low and
inspector uncovers a serious problem with the house,the house will be resold before the interest
the inspection contingency in the purchase agreementadjustment occurs.
allows the seller to reconsider the deal and withdrawThe escrow paperwork
the offer. As an alternative, the buyer may ask theAs soon as an offer has been negotiated, a huge
seller to fix the problems, reduce the price of theamount of paperwork demands attention. The secret
house, or give a cash credit towards the repairs. Andhere is to read all documents carefully, ask questions
if the seller refuses, the buyer can back out of thewhen necessary, and respond to all instructions
deal. When you're buying a house, you will want animmediately.
inspector who is licensed, meticulous, and tough. FeesThe inspection and mortgage generate their own
vary, but will average around $250 - $450. In additionpaperwork, of course. You must also submit the
to the general house inspection, it's often worthwhiledeposit, negotiate any concessions from the seller,
for you to hire specialized inspectors to performreview the title report, review estimated closing cost
chimney, sewer, or termite inspections.statements, remove the contingencies, secure
Securing the mortgageproperty insurance, prepare and transfer funds to
Securing the mortgage is the second activity. Ideally,escrow, and sign the final documents. Above all, you
you have already been pre-approved for a mortgage.must be conscious of all deadlines and not wait until
If you go to a mortgage broker for the loan insteadthe last minute. Missing a deadline or failing to sign a
of going directly to a bank or credit union, you candocument could unravel the whole deal you've
often find more flexible terms and better rates.worked hard to make.
During escrow, the details of the mortgage are