An escrow account is a critical tool both in the process of buying a home and in the home-ownership experience. In fact, escrow accounts frequently are required to complete a home purchase, and mortgage lenders often insist that borrowers include payments into an escrow account each month.
An escrow account is established when two parties are involved in a transaction. A third party serves as the escrow agent for the transaction, holding money, documents or other assets securely until the time comes to release them to the proper party. The escrow officer is guided by the terms of the contract that the two parties involved in the transaction developed. When the terms of the contract are met for the items to be released, the escrow officer releases them to the respective parties. The process ensures that a neutral party will oversee the crucial exchange in a transaction.
In most home purchases, the buyer and seller use escrow after an offer has been accepted on the home. The buyer's deposit is placed in the escrow account, and the escrow agent receives the contract and instructions for the funds in the account. Escrow allows a commitment to be made toward the home transaction while various contingencies are satisfied, such as an inspection and financing. The escrow office oversees the transfer of final payment to the seller and the release of the title to the buyer, according to the National Association of Realtors.
Mortgage lenders use escrow to help ensure that homeowners keep up with their property tax and insurance payments. With each mortgage payment, homeowners pay a portion of those bills into an escrow account that the mortgage provider controls. When the bills become due, they are paid with the funds stored in the escrow account. This process allows you to steadily set aside the necessary funds for two critical bills and avoid being faced with a large bill that you're unprepared to pay.
Escrow is sometimes used in litigation for cash settlements and judgments. The defendant deposits money owed in a settlement into the escrow account. The escrow officer then manages the distribution of the award to the plaintiff. This arrangement takes the burden off the plaintiffs to collect the funds. In the case of a class-action lawsuit, the escrow arrangement works to ensure that there is a neutral party tasked with distributing to the many plaintiffs with a financial stake.
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