Escrow is an essential real estate term you’re sure to encounter in the home buying or selling process. But what is escrow, exactly? Here is a basic guide to understanding this important part of real estate transactions:
Defining an escrow account
Escrow is a legal agreement where funding and assets are held by a third party. This neutral third-party keeps the funding safe as a transaction is being completed. Once the transaction is completed, funds are allotted to the correct parties. An escrow agreement is often seen in real estate transactions, but can also be seen with other industries such as with art, jewelry and more.
Once the money goes into escrow, the seller has to follow through to finalize the sale. Once the deal is complete, the escrow money goes to the seller and is subtracted from the total mortgage payment price.
Escrow is also used by mortgage lenders after the closing of a home. Your lender takes a share of your monthly mortgage payment and puts it into an escrow account. When property taxes and insurance are due, the money is released. This can be very helpful for homeowners as it takes the task off their plate.
Understanding how escrow works
Escrow is used for two primary reasons in the real estate industry: good faith deposits and funding for insurance and property tax fees. Good faith deposits testify to the buyer’s sincerity and earnestness to following through with purchasing the home.
For example, a seller may invest money to make repairs on a property once an offer is accepted. They may have purchased new light fixtures or new carpet at the request of the buyer.
The seller keeps the earnest money if the buyer backs out of the agreement. This supplements the money they paid due to trying to fulfill their end of the deal.
Earnest money deposit
The earnest money deposit goes towards the home’s down payment once the home purchase succeeds. An escrow officer will allot payments and will deliver the deed to the county recorder to note before closing the escrow account.
What are the benefits of escrow?
An escrow account ensures both parties are financially protected. Using an escrow company ensures funds are handled correctly. Usually, payment into this account comes from both the buyer and the seller, which encourages accountability on both ends.
Having an escrow account is a vital part of the home selling and home buying. Speak with a trusted real estate agent and escrow officer to better understand your options.
About the Author
Richard Powers
Born and raised in Lynn, Massachusetts, Richard has been a successful Real Estate Agent, specializing in the Greater Lynn area for 28 years. He was awarded the prestigious Centurion Award for 19 years in honor of his outstanding number of listings and sales and was the recipient of numerous Diamond Awards for exceptional sales and service.
In his spare time, Rich enjoys golfing, hiking with his dogs and practicing Karate, in which he holds a second-degree black belt. He also enjoys volunteering for various animal rescue groups with his wife of 33 years and is especially dedicated to supporting Faithful Companions, a local non-profit group that helps families in need receive life saving veterinary treatment for their cherished pets.
The next time you need an experienced Real Estate Agent, be sure to give Rich a call. His professionalism and knowledge of the Real Estate Industry are unrivaled.
