What is an escrow account?

An escrow account is essentially a holding tank for money that’s held by a third party. It’s used in several different capacities, but here are a couple examples to help you understand how it works.

The first is when you make an earnest money deposit on a home purchase. That earnest money is then held in an escrow account by an attorney or title company (or a real estate broker in some cases) and not released until the terms of the contract are complete. If the contract releases, the escrow officer has to release that money to either the buyer or the seller. Whoever the terms of the contract say the money should be released to, the escrow officer has to fulfill that obligation.

If the home closes successfully, that money usually goes toward the proceeds of the transaction. That way, it’s not held by the buyer or seller, but rather a third-party who’s just fulfilling the terms of the contract.

“An escrow account is essentially a holding tank for money that’s held by a third party.”

Another example of how it’s held is with your mortgage. Your mortgage is more than likely escrowing your taxes and insurance. They take a small piece of your monthly payment and put it into your escrow account. The goal for them is to build that account up until it has enough money to satisfy your tax bill at the end of the year and your insurance bill whenever that’s due.

If, for whatever reason, your payment changes, it’s likely because your loan officer miscalculated the estimated taxes and insurance due. In that case, they could actually request more money. If they’re taking too much money and there’s too much money building in that account, you can adjust it. In this example, the escrow account provides protection for the bank to ensure you’re paying your insurance and your taxes.

If you have any more questions about how escrow accounts are used or you have any other real estate topics you’d like to bring to my attention, don’t hesitate to reach out to me. I’d be happy to help you.