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Real Estate Defined: What Escrow Means and How It Works

Posted on September 11, 2023
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what escrow means and how it works

There are terms we often use and hear in real estate that could be confusing to the average home buyer or seller, including what escrow means and how it works, for instance.

What is escrow?

For starters, to learn more about what escrow means and how it works, we need a basic definition of the term. Simply put, “escrow” means “the holding of funds or documents by a neutral third party prior to closing your home sale,” as we shared in our blog, Know Your Real Estate Terminology.

Now, we are going to take a more in-depth look at what escrow means. Another way of thinking about escrow in terms of real estate transactions is protection. Often, escrow is meant to protect both the buyer and the seller throughout the homebuying process. 

There are generally two reasons an escrow account is used in real estate. First, it protects the buyer’s earnest money, ensuring the money goes to the correct party according to the conditions of the sale. 

Next, it can be used to hold the funds for a homeowner to use for property taxes and homeowners’ insurance.

How does it work?

Because there are two different purposes, there are actually two types of escrow accounts. As mentioned, one is used during the home buying process, while the other is used throughout the duration of your loan. 

For homebuyers, escrow is the time between a seller accepting a purchase offer and the buyer taking possession of the home. A third party holds the homebuyer’s earnest money during escrow. Typically, the funds are used for the down payment or closing costs. 

If the transaction goes according to plan, and the terms of the sales agreement are met, the escrow agent gives the money and property deed to the appropriate parties. However, if the property or seller doesn’t meet certain conditions, such as passing the home inspection, the buyer could back out and get their money back.

The homeowners escrow account helps you manage your home’s taxes and insurance payments, for example. Escrow allows you to easily set aside money that goes directly to the payment of those expenses on your behalf. 

Summary

Finally, even if you are still a little unsure what escrow means and how it works, your Realtor will help you understand the ins and outs of the entire home buying or selling process, including escrow! Are you ready to rev up your search for a home or thinking of listing? Ryan Roberts is your local East Alabama expert! For more real estate news and terms defined, keep reading our blogs.