Buying your first home in Maryland is a major milestone, but navigating unfamiliar terms like “escrow” can be daunting. Understanding escrow and its costs can simplify the homebuying process and help you make informed financial decisions. Here, we break down escrow basics, Maryland-specific regulations, and what new homebuyers need to know.
What is Escrow? A Quick Overview for Maryland Homebuyers
Escrow is a financial arrangement in real estate that protects both buyers and sellers. An escrow account holds money or important documents until the sale’s conditions are met. Essentially, it’s a neutral space where funds are kept safe until all parties have met their obligations.
Escrow Has Two Phases:
- Pre-Closing: The escrow account temporarily holds the buyer’s earnest money deposit. This deposit signals the buyer’s commitment to purchasing the home.
- Post-Closing: After the sale is finalized, the escrow account is used to pay ongoing expenses like property taxes and homeowners insurance. This helps you stay on top of these costs, preventing any unexpected financial burdens.
For first-time homebuyers, escrow simplifies the process by rolling multiple payments into a single monthly contribution.
Maryland’s Unique Escrow Regulations
Maryland has specific escrow rules that differ from other states, making it essential for first-time homebuyers to understand:
- Dedicated Escrow Accounts: State law requires that escrow funds be held in a dedicated account, separate from other funds. This prevents any misuse and ensures your money is kept safe until the sale is complete.
- Clear Disbursement Rules: Funds in escrow can only be released once specific conditions, like home inspections or necessary repairs, are met. If the sale falls through, Maryland law dictates that the money be returned to the rightful party according to the contract terms.
- Licensed Escrow Agents: In Maryland, only licensed professionals can manage escrow accounts, providing an additional layer of security and compliance for your transaction.
How Much to Set Aside for Escrow in Maryland
Escrow costs vary depending on property price, county tax rates, and insurance premiums. When budgeting for your home, remember that these costs are separate from your down payment and closing fees.
Here’s what to expect for a typical escrow setup in Maryland:
- Escrow Setup Fees: Paid at closing, these fees cover the cost of establishing and managing your escrow account.
- Property Taxes: Maryland property taxes vary by county but are typically paid through escrow. This means that a portion of your monthly mortgage payment is allocated for taxes to prevent you from needing to pay a large lump sum at the end of the year.
- Homeowners Insurance: Annual insurance premiums are also paid through the escrow account, making it easy to maintain coverage without missing a payment.
- Private Mortgage Insurance (PMI): If you’re putting down less than 20%, your lender will likely require PMI. This monthly insurance premium helps protect the lender in case you default on your loan and is included in your escrow payments. Once you’ve built up enough equity in your home (usually 20 to 22%), you may be able to cancel PMI, reducing your monthly payment.
Escrow Costs for a Median-Priced Maryland Home
If you’re purchasing a home at Maryland’s median price of $425,000 with a 10% down payment ($382,500 loan amount), here’s what you might need to budget for escrow, including PMI.
| Escrow Cost Breakdown | Annual Amount | Monthly Amount | Initial Deposit (2 Months) |
| Property Taxes (1.06% of $425,000) | $4,505 | $375 | $750 |
| Homeowners Insurance | $1,500 | $125 | $250 |
| Private Mortgage Insurance (1% of $382,500 loan amount) | $3,825 | $319 | $638 |
| Total Escrow Contribution | $9,830 | $819 | $1,638 |
Keep in mind that the PMI rate you receive depends on factors like your down payment and credit score. For this example, we used an estimate of 1% of the loan amount per year. Your PMI may be higher or lower depending on your unique situation.
What This Means for You:
- Total Monthly Escrow Payment: $500 will be added to your monthly mortgage payment to cover property taxes and insurance.
- Upfront Deposit Required: An initial deposit of $1,000 is needed to set up your escrow account, covering two months of property taxes and insurance premiums.
By including these expenses in your monthly mortgage payment, you’ll have one less thing to worry about and can stay on track with your financial obligations.
Why Escrow Accounts Benefit New Homebuyers
Using an escrow account offers several advantages for first-time homebuyers. By combining property taxes and insurance payments into one manageable monthly amount, you’ll have fewer bills to track and avoid unexpected costs. This streamlined approach helps you focus on enjoying your new home rather than stressing over multiple payments.
Why Choose SECU as Your Homebuying Partner?
Navigating the homebuying process can be overwhelming, especially if it’s your first time. That’s where SECU comes in. As a Maryland-based credit union, SECU has a deep understanding of local regulations and escrow requirements, making us the ideal partner to guide you through each step. We offer:
- Personalized Support: Our team provides tailored advice and resources to help you understand every part of the transaction, from securing a mortgage to setting up your escrow account.
- Competitive Mortgage Options: We offer mortgage products designed to fit the needs of first-time homebuyers.
- Educational Tools: Access our educational resources to learn more about managing escrow and budgeting for your new home.
Take Action
For Current Homeowners: Already have a mortgage but unsure about how your escrow account works? Explore SECU’s Escrow Resources for helpful tools and guidance to better manage your escrow account.
For New Homebuyers: Explore SECU Home Loans to learn how we can help make your dream of homeownership a reality. We’re here to help you understand the role of escrow in your new home journey.
