What Is Escrow?

What Is Escrow?

Let me explain escrow directly: it's a legal financial setup where a neutral third party holds assets or money for two parties completing a transaction. I manage these as an escrow agent, releasing the funds only when all agreed-upon obligations are met or I receive the right instructions. You can hold money, securities, funds, or other assets in escrow.

Key Takeaways

Escrow is that agreement where a third party holds assets or funds before transferring them between transaction parties. They keep the funds until both buyer and seller meet their requirements. You see it in real estate, but it applies anywhere funds move between parties. Online escrow is growing for secure transactions on expensive items like art or jewelry.

Understanding Escrow

Escrow comes into play when two parties transact with uncertainty about obligations being met. Think internet sales, banking, intellectual property, real estate, mergers, acquisitions, law, and beyond. Take a company selling goods abroad: they need payment assurance upon delivery, while the buyer pays only if goods arrive in good shape. The buyer places funds in escrow with me as the agent, instructing disbursement to the seller once goods are verified. This protects both sides, letting the deal proceed.

Types of Escrow

In real estate, escrow applies to transactions with conditions like inspections. You as the buyer put earnest money—a good faith deposit—into an escrow account I hold. This shows your seriousness, and it lets the seller proceed with inspections knowing funds are ready. Once conditions are met, I transfer the amount to the seller. Escrow also means accounts set up at mortgage closing for future insurance and tax payments. If your lender requires it, part of your monthly payment goes into this account to cover those costs. Your monthly payments will be higher than just principal and interest, but you avoid large annual bills since you're paying portions monthly.

For stocks, they're often issued in escrow, where the shareholder owns them but can't dispose freely until the period passes. Executives get stock bonuses this way to attract or keep them, with a wait before selling.

Online escrow protects against fraud or nonpayment in product sales. You send payment to the service I represent, which holds it until the product arrives and is verified. Then I release funds to the seller. It's ideal for high-value items like jewelry or art, and we charge a fee for this.

Advantages and Disadvantages of Escrow

For a fee, escrow adds security in transactions with large sums, protecting all parties. In mortgages, it guards against late tax or insurance payments, with monthly deposits that might overpay or underpay, requiring adjustments. Note that this means higher monthly mortgage payments compared to just principal and interest.

Example of Escrow

Homebuyers use escrow twice: first for earnest money, then at closing. Say you find a house, offer accepted, and put $5,000 earnest money into escrow. This signals seriousness to the seller, who takes it off market and does repairs. If conditions are met, the money goes to the seller, reducing your purchase price by that amount. At closing, your lender might require an escrow account for taxes and insurance. Your monthly payment could break down to $1,000 principal and interest, $100 insurance, $300 taxes, totaling $1,400. When bills are due, the lender pays from the account, ensuring timeliness and avoiding liens.

What Is the Escrow of a House?

Escrow in home buying includes accounts for earnest money, typically 1% to 3% of the price, to show you're serious and have funds. In return, the seller removes it from market and allows inspections.

How Does Escrow Work?

For mortgages, escrow means monthly payments into an account for taxes and insurance, held by a third party. Your payment includes principal, interest, taxes, and insurance; the lender pays bills when due.

What Does Escrow Mean in Mortgage?

It covers tax and insurance payments, lasting the loan's life. Lenders may require it but could end it after a year of on-time payments if loan-to-value is 80-90% or lower, upon written request.

Is Escrow Good or Bad?

Escrow is generally good, protecting buyers, sellers, and lenders by ensuring timely payments.

What Is an Escrow Disbursement?

It's a payment from the escrow account, like a lender paying taxes or insurance for the borrower.

The Bottom Line

Escrow works for real estate, stocks, online sales, and more. Funds stay in the account until the transaction completes or you verify the product. Once approved, I release money to the seller, and the managing company takes a fee.