Escrow: 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
In any transaction, a buyer is usually expecting a quality product whereas the seller usually is expecting to be paid for their product. In this scenario, you can trust that both parties will follow through with the transaction. But, when it comes to high-ticket transactions like buying or selling a home, both parties want to ensure that the transaction is fulfilled on both sides. With how complicated real estate transactions can be, both a buyer and seller may consider escrow as protection.
When entering the real estate market as a home buyer or a home seller, you may hear this term quite frequently. According to Merriam-Webster, the definition of Escrow is “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.”
Essentially, when there is uncertainty or conditions that need to be fulfilled for a real estate transaction, a third-party will hold the financial assets until these conditions are met by both the buyer and the seller.
Reasons Why You Might Use Escrow
- – As a buyer, you might want to use escrow as a way to make a good faith deposit. It also shows a seller that you’re serious about purchasing their property. You might also want to use escrow to perform your due diligence (i.e. home inspection contingency).
- – If you were to pay the seller directly, you might be taking a risk in the transaction because without escrow, there wouldn’t be anything to protect you from a dishonest seller.
- – It is common for homebuyers to use escrow twice, during the home buying process and during mortgage payments.
- – As a seller, you might want to use escrow because it will provide you with assurance that you will be paid for your property. If the deal isn’t happening fast enough, escrow allows you to back out and move on to another offer.
Pros and Cons of Escrow
Pros
- – Protects you as a buyer/seller for high price transactions involved in real estate.
- – Using Escrow allows you to make monthly payments towards your insurance and taxes instead of. paying a lump sum.
- – Escrow benefits both the buyer and seller.
Cons
- – If you use escrow for taxes and insurance, you’ll end up with higher mortgage payments.
- – Estimates are potentially incorrect, which means if your escrow is short, you’ll have to pay out of pocket.
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