What is Escrow and How Does it Work?

Escrow is a legal agreement between two parties for a third party to hold money or assets until certain conditions are met. It is a secure way to protect transactions and ensure that fraud does not occur. Escrow accounts are managed by a variety of third parties, such as an escrow company, an escrow agent, or a mortgage servicer. After closing, the lender deposits the portion of the security deposit of your mortgage payment into the account and pays insurance premiums and real estate taxes when they are due.

When you buy a home, your lender will open an escrow account to pay your taxes and insurance. After closing, the mortgage servicer takes a portion of your monthly mortgage payment and keeps it in the escrow account until your tax and insurance payments are due. You or your real estate agent will deposit this money into an escrow account while the homebuying process is going through. The security deposit required by mortgage lenders involves making monthly property tax and home insurance payments to an escrow account maintained by a third party. Your lender may require a “security cushion”, as allowed by state law, to cover unforeseen costs, such as a tax increase.

The trust can help a homeowner ensure that the money needed for taxes and property insurance will be available when the payment is due. When your property taxes and home insurance payments are due, your lender will use the money in this account to pay these bills on your behalf. It may be tempting to run out of an escrow account because it could mean a lower monthly mortgage payment, but the escrow can give you peace of mind by eliminating your responsibility to make sure those important bills are paid. You can apply for an escrow account yourself to pay taxes and home insurance, even if your lender doesn't require it. Escrow accounts are managed by the escrow agent. The agent releases assets or funds only after fulfilling predetermined contractual obligations (or upon receiving appropriate instructions).

Money, securities, funds, and other assets can be held in custody. It allows the buyer and seller to set their terms and the third party can store the funds in an escrow account while the details are resolved. The trust is most commonly used in real estate, but it is also used in many other contexts where there are many funds, intellectual property, or assets at stake, and that includes mergers and acquisitions. Escrow is a secure way to protect transactions and ensure that fraud does not occur.