Despite the way the word sounds, escrow doesn’t arrive in a flurry of coal-black feathers, throaty caws, and bold struts. Instead, it has come down through the centuries from at least the 1590s via the Anglo-French word “escrowe,” which was likely inspired by the Old French “escroe” or the Old High German “scrot,” according to Online Etymology Dictionary. Clearly, the concept of escrow has been around for a while. How does escrow work?
How Does Escrow Work
What exactly is escrow? When is it used? What are the pros and cons of escrow accounts?
What Is Escrow?
As Realtor.com explains, escrow is a contractual agreement that designates a neutral third party to step in and secure valuables and maintain them during a transaction between two or more other parties. A real estate transaction offers a perfect example for those who are trying to understand what escrow is. After all, when a buyer’s offer is accepted, their earnest money deposit doesn’t go directly to the seller. Instead, it’s handed to an escrow agent, who will oversee an escrow account and everything that flows in and out of it as the prospective homebuyer and seller make their way to the closing table.
How does escrow work? According to Realtor.com, the escrow agent will set up an escrow account to hold the funds or take possession of any goods. Then, they’ll verify that everyone is completing any tasks that must be done before the transaction can take place. When all the conditions of the contract have been satisfied, the escrow agent will release the money or goods. To use the example of a real estate sale again, the escrow agent will check that all the terms of the sales contract have been met before transferring the money to the seller and recording the title with the buyer’s name.
When Are Escrow Services Used?
Whenever you are exchanging something valuable, it’s handy to have a mediator to make sure that the deal is fair and that both parties are operating in good faith, so it’s no surprise that there are actually several scenarios where escrow services are sometimes used. As The Balance points out, escrow services are sometimes used for online sales. They’re also utilized in some stock purchases. As previously mentioned, they are used in real estate transactions as well. However, escrow’s role in real estate isn’t just limited to sales. Escrow accounts also pop up in financing plans, construction loans, and in the way that mortgage servicers collect property taxes and insurance from homeowners.
As Nolo reports, many mortgage servicers routinely collect an amount equal to roughly one-twelfth of the expected property tax and one-twelfth of the expected homeowners insurance when they collect the monthly mortgage payment. These funds are stored in an escrow account and used to pay the respective bills when they come due. Lenders prefer this strategy because they don’t have to worry about an asset that they have a financial interest in being put at risk due to a homeowner’s failure to pay. Meanwhile, many homeowners find the strategy comfortable because it prevents large tax or insurance bills by breaking these bills into monthly chunks.
What Are the Pros and Cons of Escrow Accounts?
There are pros and cons to anything, and escrow accounts are no exception. As Investopedia reports, what exactly those are depends on how the escrow is being used. With any type of transaction, using an escrow service can offer protection from bad actors and scammers. However, there are fees associated with escrow services. While you’re unlikely to find a better option in the real estate world, online shoppers may find that other alternatives are cheaper. As for the escrow accounts that are used to collect the money for property taxes and homeowners insurance, having one means that you don’t have to worry about these bills. However, it’s important to remember that the numbers used to calculate these portions of your mortgage payment are normally estimates. If your mortgage servicers are wrong, you may see corrections on your monthly mortgage statement.