What is Escrow?

Escrow is a legal concept describing a financial agreement whereby an asset or money is held by a third party on behalf of two other parties that are in the process of completing a transaction.

Escrow accounts are managed by the escrow agent. The agent releases the assets or funds only upon the fulfillment of predetermined contractual obligations (or upon receiving appropriate instructions). Money, securities, funds, and other assets can all be held in escrow.

Escrow refers to a neutral third party holding assets or funds before they are transferred from one party in a transaction to another. The third party holds the funds until both buyer and seller have fulfilled their contractual requirements. Escrow is associated with real estate transactions but it can apply to any situation where funds will pass from one party to another.

Escrow can be used when purchasing a home and for the life of a mortgage. Online escrow has been on the rise as a way to offer secure online transactions for expensive items, such as art or jewelry.

Escrow is a financial process used when two parties take part in a transaction and there is uncertainty about the fulfillment of their obligations. Situations that may use escrow can involve internet transactions, banking, intellectual property, real estate, mergers and acquisitions, law, and more.

Consider a company that is selling goods internationally. That company requires assurance that it will receive payment when the goods reach their destination. The buyer, for their part, is prepared to pay for the goods only if they arrive in good condition.

The buyer can place the funds in escrow with an agent with instructions to disburse them to the seller once the goods arrive in a suitable state. This way, both parties are protected and the transaction can proceed. For real estate, there are two escrow accounts. The first is used when you’re buying a home. The second is used during the life of the mortgage.

Escrow accounts can apply to real estate transactions. Placing the funds in escrow with a third party allows the buyer to make a good faith deposit or perform due diligence on a potential property acquisition. Escrow accounts also assure the seller that the buyer is serious about the purchase.

For example, an escrow account can be used for the sale of a house. If there are conditions attached to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow.

In this case, the buyer of the property deposits the payment for the house in an escrow account held by a third party. The seller can proceed with, e.g., house inspections, confident that the funds are on deposit and the buyer is capable of making payment. The amount in escrow is then transferred to the seller once all the conditions for the sale are satisfied.

Escrow can also refer to an escrow account that is set up at the time of mortgage closing. In this instance, the escrow account contains future homeowners insurance and property tax payments.

A portion of the monthly mortgage payment is deposited into the escrow account to cover these payments. Thus, borrowers that set up an escrow account, if required by the lender (or at their own discretion) will have higher payments than those who do not. However, they will not have to worry about paying the yearly premiums or property tax bills as they’re already paying portions of them monthly into their escrow account.

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