What are escrow fees?

Escrow fees are part of the closing costs when you purchase a home, and they’re paid to the title company or directly to the escrow company to set up escrow for your earnest money. These fees cover paperwork — including the recording of the deed — and the exchange of funds. Having escrow in place during the closing process helps keep your earnest money safe.

There are specific costs typically held in escrow, including:

• Real estate fees
• Loan fees
• Third-party payments
• Seller’s profit

Using escrow to hold these costs is a bit like using a savings account to keep yourself from spending money. Escrow fees aren’t the only closing costs you’ll need to pay, so be sure you understand what other expenses are required before you can own your new home.

How much are escrow fees?

Escrow fees vary wildly from state to state and depend on the cost of the home, but expect to pay a small percentage of your home’s price. You can calculate the cost of escrow fees with a simple equation, once you know a few things. First, you’ll need the price of the house — we’ll say it’s $250,000 in this example. Then, you’ll need the escrow company’s fee. This is usually a percentage — we’ll say 1 percent.

To calculate the escrow fees for this example, take 1 percent of the $250,000 house. That means the escrow fees for this home purchase would be $2,500. Always ask the escrow or title company what they charge so you can understand your costs better. You may also be required to pay a real estate attorney depending on your state.

Who pays escrow fees – buyer or seller?

Typically, this cost is split between the buyer and seller, although it can be negotiated that one party will pay all or nothing. There is no specific rule for who pays the escrow fees, so speak to the seller of your future home or your real estate agent to work out who will pay. Both parties are within their rights to ask the other to help cover costs.

Learn more about buying a home

In the market for your first home? Learn more about the process of buying a home with our first time home buyers guide.

This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.