Types of escrow in real estate
There are two kinds of escrow that can be used in a real estate transaction. First, there’s the escrow used as an example above, when a brokerage, title company, or lawyer establishes an account to hold a down payment that’s part of a real estate sale. This account keeps the money safe from everyone, ensuring the seller of the property that the buyer will not back out of the transaction without incredibly good reason. It also ensures the buyer that the seller won’t simply run off with their money without passing the title to the property.
The other type of real estate escrow is mortgage-based. These generally are only available to home buyers using specific types of mortgages. In a mortgage-based escrow, a homeowner pays an extra amount of money every month to their mortgage lender, which then places the money in escrow for the yearly payment of items like taxes and insurance. The homebuyer establishes the escrow with initial funding at closing, which can increase closing costs. However, this can prevent significant losses later on from a lapsed insurance policy or back taxes.