Your escrow transaction: here's what to know

Your escrow transaction: here's what to know

Before you buy, sell, or refinance a property, it can help to understand a lot of the terminology involved. One of the areas you’ll want to understand is escrow, because it’s going to be important for your transaction.

WHAT DOES ESCROW DO?
Simply put, escrow is a legal agreement that allows a third party to hold money in a property transaction. That can be either when a buyer and seller are conducting a purchase and sale transaction, or when a person gets (or refinances) a mortgage. Most people think of escrow in the context of the closing table. The buyer will put down some earnest money when they make an offer on a property, and then that money will be held in escrow by the title company. When the sale closes, the funds will then be released to the seller. Another part of escrow is to help mortgage companies make sure that items like property taxes and homeowners insurance are being paid on properties. Naturally, mortgage companies want to protect their interests, as do homeowners. If someone gets a mortgage and doesn’t pay taxes or insurance, that could cause the mortgage company’s investment in that property to be at risk. By escrowing money to pay these items, the lender has confidence that their investment in the property is a safe and secure one.

WHY DOES ESCROW MATTER?
Escrow matters because it protects people and businesses. Financial issues are very important in a property transaction, whether it’s a sale and purchase or a refinance. By using escrow, everyone involved can have the protection and security they want, along with the trust in a title company that’s going to handle their money properly. A third party doesn’t have any stake in the transaction, so they’re a great choice to hold funds.