What is Escrow?
When your real estate agent says that money will be “In Escrow,” do you know what they’re talking about?
Escrow is an arrangement in which you pay a third party money for something and then that third party disburses it for you. Typically, some conditions must be met.
Taxes and Insurance
A common use of escrow is in the payment of property taxes and insurance by a homeowner’s mortgage lender. The mortgage lender collects mortgage payments monthly and included in these payments is enough money to cover the real estate taxes and property insurance. Then, when the taxes and insurance are due, the lender will pay the taxes directly. This gives the lender the assurance that the taxes and insurance will be paid, thus reducing his risk in loaning the money. Every year, the escrow account is analyzed to ensure that the holder of the escrow account has enough money to pay the taxes and insurance but not an excessive amount.
Deposit on a Purchase
Another common use of escrow is when a potential home buyer provides a deposit on a home he wishes to buy. The deposit money is not given to the home seller until closing so it is held in escrow until the closing. This provides some assurance to the seller that the buyer is actually committed to purchasing the home, but it also allows the buyer the comfort of knowing that the money can’t be taken if the seller doesn’t cooperate.
A third situation in which you’ll hear the term escrow is during the negotiation of a home purchase. Imagine that a homeowner has agreed to replace an appliance or complete some construction but it hasn’t happened by closing. In order to prevent delay of closing, the attorneys may make an arrangement in which the seller will deposit some sum of money in escrow as a sort of security against the appliance or the construction. Then, when the buyer has indicated that the appliance has arrived and is in good condition or that the construction was completed to specification, the money will be returned to the seller.
At any time during a real estate transaction, if you don’t understand a term being used, be sure to ask your real estate professional!