Publish Date: October 31, 2020
An escrow account is a temporary deposit held by a third party on behalf of two other parties, which is usually called an escrow agent. The temporary account operates until the process of a transaction is complete and all conditions between both parties are settled. The money or other assets are debited from this account when the predetermined legal obligations are fulfilled or the escrow agent receives the instructions to release the assets.
Escrow account is designed differently than regular accounts. The major difference between an escrow account and other types of deposit accounts is its temporary nature as was opened to support a certain transaction. In addition, its management by the third party is not common among other types of deposit accounts.
Functions of escrow accounts
While escrow account can hold securities, funds, money and other assets, more often this temporary deposit is used in real estate transactions. It is used when a buyer wants to perform an inspection or any other due diligence on the property while assuring that he or she has enough funds to actually buy the property. This way, the seller can be confident that if the property corresponds to the description, the buyer will be able to buy it and the seller has not wasted his time and funds. On the other hand, the buyer can be sure that his money is safe in the escrow account and will be delivered to the seller only if he is satisfied with the conditions of the house and is ready to purchase it.
Utilization of an escrow account
An escrow account is also used between lenders and borrowers in mortgage transactions. Typically, lenders are the ones requiring deposits in escrow account made by the borrower on a regular basis. Deposits are used to pay real estate taxes as well as insurance. Another reason to use an escrow deposit in real estate transactions is when a property is only under construction, while a buyer already wants to reserve it for him or her. It is possible to deposit a certain amount of funds in the escrow account to make sure that by the time a building is ready, he or she will be first in line to get the craved property.
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