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It goes without saying that purchasing a home is a much bigger and riskier transaction than most. When you get into transactions this massive, and with extensive amounts of money on the line, you naturally are going to want to do anything possible to build trust and protect your assets. Not only does the buyer want to ensure that the transfer of the title runs smoothly, but also the seller, realtors, title companies, and lenders want to be protected. That’s where the concept of escrow comes in.
Escrow generally refers to a trusted, neutral third-party who holds onto something of value. In real estate purchases, escrow is usually used in two ways. First, escrow comes into play in the actual purchase of the home. Once an offer is accepted, there is what is called an opening of escrow. Essentially, all obligations from all parties are placed into an escrow account. This includes the down payment and financing on the buyer’s part and inspections and clear title on the seller’s part. If the escrow agent determines that all predetermined contractual obligations are met, the escrow agent then pays all parties involved and gives the title to the buyer.
The other use of escrow in real estate comes into play when you are making your mortgage payments. Often lenders want to protect themselves and their collateral by making sure that taxes and insurance for a property are paid on time. In the unlikely scenario that you cannot pay your mortgage, the lender may end up owning your property, and therefore will want the property taxes and insurance covered. The solution to this is to have home buyers pay monthly portions of their annual taxes and insurance to be held in an escrow account until payment is due.