What Exactly is Escrow?

November 15, 2022

When you call our firm or visit our website you’ll notice we use the phrase “Security Title and Escrow.” That last word can be a point of confusion for those who are new to the real estate market. Whether you’re looking to buy a home for yourself/your family or you’re looking to become a long-term real estate investor, it’s time to become familiar with the concept of escrow.

Escrow introduces a third party to your real estate transactions. This can be intimidating as it can feel daunting enough to deal with one party in such a big investment, but there are good reasons for this. We’ll get into these reasons and help you understand why it’s necessary.

Defining Escrow

Let’s boil this down to the basics before we look at how escrow is applied to your transactions. The Merriam-Webster dictionary has an apt definition of the term – “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.”

This definition succinctly describes the role of escrow in any transaction, including real estate. The third party holds a trust which controls the assets as defined in an agreement between the two primary parties until the full conditions of the agreement are fulfilled.

Obviously, with large real-estate transactions, escrow may be necessary as certain conditions of the agreement won’t be fulfilled until the term of the loan is complete or the loan is paid in full.

When Is Escrow Necessary?

Escrow accounts are almost always present during real estate transactions even if they’re not mandated by law. Many lenders require them or have a strong inclination to include them in loan agreements.

The first and most common point in the process where escrow will be established is when an earnest money payment is made. Earnest money is a good-faith payment from the buyer to the seller showing that they’re committed to making the purchase. These payments are placed into escrow to be held until a final purchase agreement is finalized (i.e. the buyer has secured a loan and signed all the necessary documents). At that point, the earnest money is generally taken out of the escrow account and put into the seller’s account as part of the down payment for the home.

After this, the lender backing your mortgage will often open an escrow account to manage tax and insurance payments. Generally, the loan servicers will define a required amount to be held in escrow to make sure they can pay taxes and insurance premiums as necessary. This amount will change from year to year depending on how much is owed which can result in a partial refund or extra charges from your lender.

We Can Manage Escrow for You

At Schlegel Livingston, we make the escrow process easier and provide you with peace of mind. Handing over this amount of money can be stressful, so we want to help you through life’s biggest moments with clarity and assurance. Contact our team and we’ll walk you through the process.