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What is Escrow and How Does it Work?

September 24, 2021

Real estate transactions can be complicated. Both the seller and the buyer often have issues with the sale. Escrow is an account that holds funds back until the terms of the contract are fulfilled. Escrow is helpful because it protects both the buyer and seller and allows the sale to go through rather than waiting for the issues to get resolved first. Money or assets placed in escrow are held by a third party until the completion of the specific requirements. Escrow may be on behalf of the buyer or the seller.

How Does Escrow Work?

An escrow account is set up with a third party. Funds are deposited into escrow based on the specific requirements. There are two main types of escrows used in realty transactions. Money may be placed into an escrow account to pay for repairs or waiting for a home inspection. The account ensures that the party is able to pay for the required issues. Once the issues are resolved, the money will be returned. Another reason for escrow is as part of a mortgage. Some lenders require escrow to hold funds that will pay for such things as property taxes and homeowner’s insurance.

What are the Pros and Cons of Escrow?

There are some pros and cons to escrow accounts for buyers and sellers. An escrow account provides some assurance that the party has the funds in place to take care of the issues that could otherwise prevent closing on the property. This allows the sale to go through as intended, which can benefit both the buyer and seller. However, the escrow account ties up funds and requires you to use them for specific purposes. If you do not complete the tasks, you will not get your money back. Escrow accounts with mortgages will give you peace of mind that you can pay your taxes and other essential expenses, however, it can raise your monthly payments.

How Long Do Funds or Assets Remain in Escrow?

An escrow account remains open until the party satisfies the requirements. Once you complete the reason for escrow, they must provide proof and request the release of their funds. The third party or holder of the escrow account will only release the funds once the proper process is complete. This can take a period of time, during which your funds will continue to stay in escrow. For instance, if the escrow is in place to pay for a repair, you must provide proof that you completed the repair before escrow funds will be released.

In the case of a mortgage escrow, the account will remain in use for the duration of the mortgage or until the requirements have been sufficiently satisfied. If you have trouble getting your funds out of an escrow account, you may need help from an experienced attorney. Escrow accounts can be complex and you may be able to negotiate the inclusion of them before the real estate closing. To learn more about escrow accounts contact our legal team at Moen Sheehan Meyer, Ltd. online or by phone at (608)784-8310.

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