Escrow- What is it?

An escrow is known as an arrangement made under a written agreement by two parties making a transaction. The process usually entails a trusted and independent third party receiving funds and/or documents for the transaction, which they later release to the receiving party. Escrow is also known as a financial account where a broker hold funds for the receiving party, until the terms of their transaction are fulfilled.


Escrow is basically the money held by a third party until the transacting parties complete the terms of their agreement. They’re commonly used in transactions between two parties that require compensation for a service. Their most notable use, however, is in real estate, where money held between two parties is stored in an escrow.

The money in the escrow account is kept separate from a mortgage account, so the funds within the escrow can be used for the payment of the mortgage’s corresponding conditions like property taxes and insurance. Mortgage lenders generally set up escrows to make sure their homeowner clients pay property tax before finalizing their transaction.

Escrows are necessary for one reason: ensuring that funds and/or property involved with a transaction don’t change hands before the terms of the arrangement are completed. The escrow holder or third party has the obligation to hold funds and/or documents while the transaction takes place.

Both parties involved with the escrow transaction choose the third party as the escrow holder. It’s often recommended to choose an escrow holder who has experience handling escrow brokerage while not charging any referral and/or service fees of any kind.

The main duties of an escrow holder is following their instructions provided by the transacting parties, which usually includes handling the funds and/or documents in accordance with the terms of the agreement, complying with requests from the transacting parties and closing the escrow once the terms of the arrangement are met.

Escrows ensure that both transacting parties have a fair and evenhanded transfer of the funds and/or documents involved with a transaction. It’s especially necessary when exchanging funds and/or property during a transaction for a new home. Home purchases need to happen as smoothly as possible, so escrow ensures that the exchange of real estate funds isn’t prolonged by problems or issues with buyer, lender and/or seller.

Escrow, as mentioned, is also handy in transactions between parties who are agreeing to a service. However, since real estate requires funds and/or documents to be handled carefully, escrow is a necessity in that industry.