What is Escrow?
Escrow is a legal term that refers to a financial instrument in which a third party holds an asset or escrow money on behalf of two other parties who are completing a deal. Escrow accounts may include escrow fees maintained by agents who hold monies or assets until they receive proper instructions or until contractual obligations are fulfilled. Escrow can be used to hold money, securities, funds, and other assets. It’s frequently recommended as a substitute for a certified or cashier’s check.
An escrow agreement is a contract in which a third party receives and disburses money or property on behalf of the primary transacting parties, with the disbursement conditional on the transacting parties’ agreement. An account set up by a broker to keep funds on behalf of the broker’s principal or another person until the transaction is consummated or terminated; or a trust account set up in the borrower’s name to pay obligations such as property taxes and insurance premiums. The word escrow comes from the Old French word escrow, which meant a scrap of paper or a scroll of parchment held by a third party until a transaction was completed.
How does Escrow work?
Escrow is a service that is utilized when two parties are completing a deal and there is a question about whether one of them will be able to meet their obligations. Escrow is used in a variety of contexts, including Internet transactions, banking, intellectual property, real estate, mergers and acquisitions, and law.
Consider a corporation that sells things all around the world. That business needs assurance that it will be paid when the goods arrive at their destination. On the other hand, the buyer is only willing to pay for the items if they arrive in acceptable shape. The buyer can entrust the funds to an escrow agent, who will disburse them to the seller after the products arrive in excellent condition. Both parties will be safe, and the transaction will be completed.
Escrow and Real Estate
Real estate deals can use escrow accounts. The buyer can undertake due diligence on a potential transaction by putting the funds in escrow. Escrow accounts also provide assurance to the seller that the buyer will be able to complete the transaction. An escrow account, for example, can be utilised for the selling of a home. The buyer and seller may agree to employ escrow if the sale is subject to conditions, such as passing an inspection.
Escrow also refers to an escrow account established at the time of a mortgage settlement. The escrow account is used to hold future payments for homeowners insurance and property taxes. To cover these costs, a portion of the monthly mortgage payment is paid into the escrow account. As a result, mortgagees who set up an escrow account (which the lender may mandate) will have greater payments than those who do not; but, they will not have to worry about paying yearly premiums or property tax bills because they are already paying it monthly into their escrow account.
Escrow Fees and Closing Costs
Last Updated on 05/25/2022 by Mark Does
Financial Consultant and Author