Escrow is a financial arrangement where a neutral third party, called an escrow agent, holds funds, assets, or documents on behalf of two parties involved in a transaction until certain agreed-upon conditions are met
. This arrangement ensures that neither party has control over the assets until all contractual obligations are fulfilled, providing security and trust in the transaction. Key features of escrow:
- The escrow agent holds money or property temporarily to protect both buyer and seller or other transacting parties
- Funds or assets are only released when specific conditions or contractual terms are satisfied
- Escrow is commonly used in real estate transactions, such as holding a buyer’s earnest money deposit or managing payments for property taxes and insurance throughout a mortgage term
- It is also used in business sales, mergers and acquisitions, online transactions, and other scenarios involving significant or complex exchanges of assets
- The arrangement is governed by an escrow agreement that outlines the terms, conditions, and responsibilities of all parties involved
Examples of escrow use:
- In home buying, the buyer’s deposit is held in escrow until the sale closes, protecting both parties
- Mortgage lenders often require escrow accounts to collect and pay property taxes and insurance premiums on behalf of homeowners
- In online or business transactions, escrow can hold funds until goods or services are delivered as promised
In summary, escrow acts as a trusted intermediary holding assets securely until all parties meet their obligations, reducing risk and ensuring fairness in transactions.
