What is escrow?

Escrow refers to a financial arrangement in which a third party holds and manages funds or assets on behalf of two parties that are involved in a transaction. Escrow is commonly used in real estate transactions, but it can also be used in other situations, such as online sales, intellectual property transfers, and legal settlements.

In a real estate transaction, an escrow account is typically created by the buyer's real estate agent, attorney, or lender, and is used to hold the buyer's deposit until the sale is finalized. This deposit is typically referred to as "earnest money," and is intended to demonstrate the buyer's commitment to the purchase.

Once the sale is finalized, the funds in the escrow account are released to the seller, and the property is transferred to the buyer. If the sale falls through for any reason, the funds in the escrow account may be returned to the buyer, subject to the terms of the purchase agreement.

Escrow accounts can also be used to hold funds for property taxes, insurance, and other expenses related to the property. In these cases, the lender may require the borrower to make monthly payments into an escrow account, which will be used to pay these expenses on the borrower's behalf.

The use of escrow can help to protect both parties in a transaction by ensuring that the funds are held by a neutral third party, and are only released when certain conditions are met. Escrow can also help to simplify the transaction process by consolidating all of the funds and paperwork into a single account.

Overall, escrow is an important tool in real estate transactions and other financial transactions, and can help to ensure that the process goes smoothly and all parties are protected.