What is escrow? A beginner's guide

by Kristen Costa 05/29/2024

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
Author

Kristen Costa

I've been listing and selling in Wilmington and surrounding areas since 1987 and have been affiliated with Fudge Properties since 2007. I have a strong reputation for outstanding quality of both work and interpersonal relationships, knowing what needs to be done and how to elicit cooperation for getting it done. I'm also proficient and knowledgeable about the Mass Housing program guidelines, successfully completing numerous housing lotteries for first time home buyers, over 55 buyers and renters. Whether you're buying or selling, I can help you get the best deal. Just looking? That's OK. Use my website all you like, but you'll have to create a free account to unlock all the best search features. Once you sign up, you'll be able to save listings, save your search criteria, get automated email updates for new homes matching your saved search criteria, and more. Good luck on your house hunt! I hope to hear from you soon.