what is escrow 
escrow is a legal concept describing a financial agreement whereby an asset or money is held by a third party on behalf of two other parties that are in the process of completing a transaction escrow accounts are managed by the escrow agent the agent releases the assets or funds only upon the fulfillment of predetermined contractual obligations or upon receiving appropriate instructions money securities funds and other assets can all be held in escrow understanding escrowescrow is a financial process used when two parties take part in a transaction and there is uncertainty about the fulfillment of their obligations situations that may use escrow can involve internet transactions banking intellectual property real estate mergers and acquisitions law and more consider a company that is selling goods internationally that company requires assurance that it will receive payment when the goods reach their destination the buyer for their part is prepared to pay for the goods only if they arrive in good condition the buyer can place the funds in escrow with an agent with instructions to disburse them to the seller once the goods arrive in a suitable state this way both parties are protected and the transaction can proceed for real estate there are two escrow accounts the first is used when you re buying a home the second is used during the life of the mortgage types of escrowescrow accounts can apply to real estate transactions placing the funds in escrow with a third party allows the buyer to make a good faith deposit or perform due diligence on a potential property acquisition escrow accounts also assure the seller that the buyer is serious about the purchase for example an escrow account can be used for the sale of a house if there are conditions attached to the sale such as the passing of an inspection the buyer and seller may agree to use escrow in this case the buyer of the property deposits the payment for the house in an escrow account held by a third party the seller can proceed with e g house inspections confident that the funds are on deposit and the buyer is capable of making payment the amount in escrow is then transferred to the seller once all the conditions for the sale are satisfied escrow can also refer to an escrow account that is set up at the time of mortgage closing in this instance the escrow account contains future homeowners insurance and property tax payments a portion of the monthly mortgage payment is deposited into the escrow account to cover these payments thus borrowers that set up an escrow account if required by the lender or at their own discretion will have higher payments than those who do not however they will not have to worry about paying the yearly premiums or property tax bills as they re already paying portions of them monthly into their escrow account stocks are often issued in escrow in this case while the shareholder is the real owner of the stock the shareholder has limited rights when it comes to the disposal of the stock for example executives who receive stock as a bonus to their compensation often must wait for an escrow period to pass before they can sell the stock stock bonuses are often used to attract or retain top executives online escrow like real estate and stock market escrow protects the buyer and seller from fraud or nonpayment an online escrow service acts as the third party for online product sales buyers send their payments to the escrow service which holds the money until the product is received once the product is delivered and verified the online escrow service releases the funds to the seller escrow services are best suited for high value items such as jewelry or art the online escrow company charges a fee for the service you can request an escrow account yourself for the tax and insurance payments on your house even if your lender doesn t require it escrow can help a home owner be sure that money needed for property taxes and insurance will be available when payment is due in other words instead of having to come up with a large lump sum the homeowner can make smaller monthly deposits in an escrow account which will be disbursed by the agent at the appropriate times advantages and disadvantages of escrowfor a fee escrow can provide parties to transactions that involve large amounts of money an assurance of security escrow accounts for mortgages can help protect the borrower and lender from potentially late payments for property taxes and homeowners insurance these monthly amounts are usually estimated you can overpay or underpay into your escrow account which may require an adjustment when it comes time for the servicer to make the payments the convenience of monthly escrow payments requires a higher monthly payment compared to paying just principal and interest provides protection during transactions notably for real estate involving sizable amounts of moneyallows for monthly payments toward insurance and taxes instead of a large lump sum beneficial for both the buyer and seller when big ticket items are involvedhigher mortgage payments if escrow is used for taxes and insurance estimates might be incorrect for tax dueonline escrow service fees might be higher than those on other platforms such as paypalexample of escrowhomebuyers often use escrow twice first as earnest money and then at closing say that john wants to buy a home he finds a house and decides to make an offer the offer is accepted and he must put earnest money of 5 000 into escrow the money put in escrow shows the seller that john is seriously interested in buying the property in return the seller takes the property off the market and finalizes repairs etc all goes well and at the time of the purchase the escrow money is transferred to the seller and the purchase price is reduced by 5 000 at the closing john agrees to set up an escrow account with the lender to pay property taxes and homeowners insurance john s monthly payments look like this then when the yearly taxes and insurance payments are due the lender makes them using money in the escrow account some lenders require an escrow account to ensure that both of these are paid on time if taxes go unpaid the tax authority could place a lien on the property which is not in the best interest of the lender 