Escrow is when money is held by a third party on behalf of two other parties that are in the process of a large financial transaction—in this case, the home buyer and the home seller negotiating a home sale.

It’s important to remember that that money in escrow isn’t sitting in a void. You will be working with an escrow agent who will help ensure that the conditions of the real estate contract are fulfilled before money is released to the seller.

When you get a home loan and are in the midst of closing on that loan, you will have what is known as a home in escrow. When you buy the home, the escrow agent will make sure the money is transferred to the right people at the right time.

Escrow has additional benefits when purchasing a home such as:

Escrow Keeps Buyers & Sellers Safe

When you buy a home, you will put what is known as earnest money down on the home, money that shows the seller that you are committed to purchasing the home. This also prevents you, the buyer, from making multiple offers on multiple homes, which takes them off of the market—a major pain for sellers if you choose not to purchase in the end.

That earnest money in escrow prevents sellers from losing money should you decide not to purchase the home last minute. If you back out of the deal without a legitimate reason, the money held in escrow will go to the seller for their troubles.

Escrow also helps protect buyers in events such as an inspection found something that needed repairs. Let us say the basement leaks water. If the seller agrees to repair the issue but a final inspection shows that it wasn’t correctly repaired, the buyer’s money is safe until the basement is fully repaired.

Escrow Helps Manage Your Home Loan & Other Payments

Additionally, when you put earnest money on the home, that money is held in escrow and will eventually go towards the home’s down payment and closing costs.

Money held in escrow will also help make it easier for buyers to manage multiple payments like their taxes, insurance and mortgage. The escrow agency where the money is held will make sure the right amount is paid on time.

However, paying your insurance and other payments via escrow is optional. You can choose to waive escrow and pay these directly yourself.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.