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A guide to escrow: Understanding how escrow works

by Joseph Anselmo 09/11/2023

Escrow is an essential real estate term you’re sure to encounter in the home buying or selling process. But what is escrow, exactly? Here is a basic guide to understanding this important part of real estate transactions:

Defining an escrow account

Escrow is a legal agreement where funding and assets are held by a third party. This neutral third-party keeps the funding safe as a transaction is being completed. Once the transaction is completed, funds are allotted to the correct parties. An escrow agreement is often seen in real estate transactions, but can also be seen with other industries such as with art, jewelry and more. 

Once the money goes into escrow, the seller has to follow through to finalize the sale. Once the deal is complete, the escrow money goes to the seller and is subtracted from the total mortgage payment price. 

Escrow is also used by mortgage lenders after the closing of a home. Your lender takes a share of your monthly mortgage payment and puts it into an escrow account. When property taxes and insurance are due, the money is released. This can be very helpful for homeowners as it takes the task off their plate. 

Understanding how escrow works

Escrow is used for two primary reasons in the real estate industry: good faith deposits and funding for insurance and property tax fees. Good faith deposits testify to the buyer’s sincerity and earnestness to following through with purchasing the home.  

For example, a seller may invest money to make repairs on a property once an offer is accepted. They may have purchased new light fixtures or new carpet at the request of the buyer. 

The seller keeps the earnest money if the buyer backs out of the agreement. This supplements the money they paid due to trying to fulfill their end of the deal. 

Earnest money deposit

The earnest money deposit goes towards the home’s down payment once the home purchase succeeds. An escrow officer will allot payments and will deliver the deed to the county recorder to note before closing the escrow account. 

What are the benefits of escrow? 

An escrow account ensures both parties are financially protected. Using an escrow company ensures funds are handled correctly. Usually, payment into this account comes from both the buyer and the seller, which encourages accountability on both ends. 

Having an escrow account is a vital part of the home selling and home buying. Speak with a trusted real estate agent and escrow officer to better understand your options.

About the Author

Joseph Anselmo

Hi, I'm Joseph Anselmo  

I am well organized, highly disciplined, and possess an outstanding professional work ethic. I strive to anticipate the needs of my clients and react flexibly to those needs. 

In addition to a Bachelor of Science degree in Business Management, I have an extensive background in technology and in social media marketing. And my solid mathematics background gives me an edge over my counterparts when it comes to interpreting market data and numbers to your advantage. 

I can get you the highest offer for your property when you are selling and can negotiate the lowest price for the property you are buying. 

Hiring me means having someone who is committed to helping you buy or sell your home with the highest level of expertise in your local market. This means also in helping you through each step of the process, including the documentation, the offer, the negotiations, passing all inspections, and working with you through closing. 

Nothing is more exciting to me than the gratifying feeling I get from helping people meet their real estate needs, now and throughout their lifetime. 

I'd be honored to put my real estate experience to work for you.