What is Escrow?
When someone wants to buy a property/good/service from another person or company, money has to be transferred from buyer to seller.
Escrow is an account or tool or a third party agent who receives the funds from buyer and holds it until the completion of transaction. Upon completion, money is transferred from the escrow account to the seller account.
Why Escrow needed?
It protects both seller and buyers.
It ensures to the seller that the buyer has enough funds to complete the transaction.
It ensures to the buyer that goods or services will be delivered as promised and in the condition promised by the seller.
Types of Escrow
(1) Mortgage Escrow
This escrow account is used when we buy a house on mortgage.
The mortgage escrow account is set up and managed by the mortgage lender.
It is done at the time of closing.
As a part of the monthly mortgage payment, the buyer pays charges for property taxes, homeowner's insurance, and mortgage insurance to the lender. The lender puts this money in escrow account and takes out this money at end of the year and pays for the party/agency this payment is belonged to. This is a way to ensure that yearly bills are paid on time. Mortgage escrows are usually optional, but can be compulsory when a buyer's down payment money is less than 20%.
(2) Earnest Escrow (Real Estate Sales Escrow)
This account may be needed at a very initial stage of home buying. It is needed at the time when a buyer has already liked a house and wants to kick off the buying process. Here, earnest money from buyer side is deposited in an escrow account.
This is a surety to the seller (or real estate company) that buyer is really interested in buying the house.
It also ensures to the buyer that the house will get off the market and won't be sold to someone else.
It is also referred as pre-closing escrow account.
(3) Renters Escrow
Security deposit from a renter is kept into the escrow account.
This ensures to the renter that the deposit money will be returned at the end of the contract.
This also ensures to the landlord that they will keep getting their rent money monthly. Also, in case of damages by renters, landlord legally can use the escrow money.
(4) Other Escrows
An escrow account can be used with any other transaction which can protect both seller and buyer. It can be used during buying good/services, any kind of monthly payments, constructions, capital market transactions, trades, merges/acquisitions, etc.