You probably hear it all the time: “our house is in escrow.” Escrow seems like one of those words you think of a Mr. Monopoly-looking guy using, twirling his blindingly-white mustache and watching a polo match in a linen suit. Escrow seems like a weird word, doesn’t it? Shouldn’t it have some special meaning behind it? I did my research and I got nothing. It came from some old French word. So, what is escrow?

The Skivvy

Let’s start with the basics: the dictionary definition. Escrow is the process of an impartial third party holding a valuable asset (usually cash) until the transaction is complete. Through the homebuying process, you’ll probably encounter escrow twice.

Escrow and Real Estate

The first time you’ll encounter escrow is when you make an offer on a home, you’ll write a check to the seller for a small percentage of the sales price, or what’s known as “earnest money”. Don’t worry, you’re not giving the seller any of your money – yet. The earnest money is held by a neutral third party, the escrow agent, until you and the seller negotiate the contract and close the deal. The role of escrow agent is usually played by an attorney or the title company.

During this limbo period is when your money is in escrow.

Escrow and Mortgage

The second time you’ll encounter escrow is referring to your mortgage payment. When you get a home loan, it’ll usually come with an escrow account. The account’s purpose is to hold funds that pay for property taxes and homeowners insurance. Though these are paid annually, your lender will require that you pay a percentage of them every month along with your mortgage payment. The benefit of an escrow account is that you don’t have to worry about keeping track of all these different payments and who they go to; your lender takes care of it for you.

There are a few loan programs that require an escrow account, like FHA loans, but not all do. You don’t have to have one. If you make a down payment of 20% or more, your lender will be more inclined to waive the escrow requirements since you have more invested in the home.

Now you can impress your friends and enemies by dropping escrow into everyday conversation. If you have any questions, you know where to find us. In fact, you’re already in the right place!

Breaking Down Escrow