For most buyers, purchasing a real estate property is one of their longest and most challenging financial transactions. In fact, it can take up to 30 years to fully pay for a house.

To protect your money when buying a house, the seller or your real estate agent might offer to have an escrow account. However, many buyers don't actually know what escrow means and its benefits. In this article, we'll help you understand how escrow works and how it can benefit you in your real estate transactions.

The Meaning of Escrow in Real Estate

First, let's define the term escrow. Escrow is a legal agreement in which a third party keeps certain documents and funds until a particular condition is met. It can be used in different situations, including internet transactions, stocks, gaming, real estate, etc.

In the real estate setup, an escrow agent holds onto the buyer's money or the seller's property until all conditions are completed or the home-buying process is finished. The escrow agent acts as a mediator and ensures that all necessary paperwork and funds are in place before the sale and home ownership can be completed.

How Does It Work?

When purchasing a real estate property using escrow, you'll first need to make an account that holds your funds. Those funds in your escrow account are managed by a neutral third party, which is usually a law firm or title company.

The escrow officers will also collect and review all necessary documents, such as land titles and home inspection reports. And once all conditions are met, the escrow agent will disburse the funds and then transfer the ownership of the property to the buyer.

Typically, homebuyers use escrow twice — such as paying a deposit and during house closing. If you want to buy a home, you must put a deposit or downpayment in your escrow account to show that you're seriously interested in buying the property. In return, the seller will not entertain any other interested buyers and take the property off the market.

At the closing or when the seller has accepted your offer as a buyer, you may want to get a loan or mortgage to pay for the house. You can set up an escrow account with the lender to pay for the monthly mortgage, property taxes, and home insurance.

The Benefits of an Escrow Account

The primary purpose of having an escrow account is to protect all parties throughout the home-buying process. Here are other benefits for home buyers, homeowners, and lenders:

For Home Buyers

Though escrow protects all parties involved, the buyer is benefited the most. This is because the escrow ensures that the house deposit or earnest money will return to the buyer if the purchase deal fails for whatever reason. If you've given the money directly to the seller, it's possible that the seller won't return your deposit.

For Homeowners

With an escrow account, homeowners will pay a smaller amount of money throughout the year instead of big lump sums. Your mortgage lender will also ensure that your tax and insurance payments are paid on time. Some escrow servicers will even cover you if there aren't enough funds in your account.

For Lenders

A mortgage escrow account benefits lenders by making sure that the homeowner pays on time. The escrow agents also take care of taxes and other insurance payments. If homebuyers fail to pay, the escrow officers ensure that the property is protected from foreclosure.

Conclusion

Escrow may seem complicated, but it's a great way to protect your money as a homebuyer. This is also helpful for homeowners to make their payments on time. If you're still unsure if you need to get an escrow account, consider hiring a real estate agent to help you decide.