What is escrow? Understanding the basics

by Wendy Wiegand 01/15/2024

Escrow is an essential real estate term you’re sure to encounter in the home buying or selling process. But what is escrow, exactly? Here is a basic guide to understanding this important part of real estate transactions:


Defining an escrow account

Escrow is a legal agreement where funding and assets are held by a third party. This neutral third-party keeps the funding safe as a transaction is being completed. Once the transaction is completed, funds are allotted to the correct parties. An escrow agreement is often seen in real estate transactions, but can also be seen with other industries such as with art, jewelry and more. 


Once the money goes into escrow, the seller has to follow through to finalize the sale. Once the deal is complete, the escrow money goes to the seller and is subtracted from the total mortgage payment price. 


Escrow is also used by mortgage lenders after the closing of a home. Your lender takes a share of your monthly mortgage payment and puts it into an escrow account. When property taxes and insurance are due, the money is released. This can be very helpful for homeowners as it takes the task off their plate. 


Understanding how escrow works

Escrow is used for two primary reasons in the real estate industry: good faith deposits and funding for insurance and property tax fees. Good faith deposits testify to the buyer’s sincerity and earnestness to following through with purchasing the home.  

For example, a seller may invest money to make repairs on a property once an offer is accepted. They may have purchased new light fixtures or new carpet at the request of the buyer. 

The seller keeps the earnest money if the buyer backs out of the agreement. This supplements the money they paid due to trying to fulfill their end of the deal. 


Earnest money deposit

The earnest money deposit goes towards the home’s down payment once the home purchase succeeds. An escrow officer will allot payments and will deliver the deed to the county recorder to note before closing the escrow account. 


What are the benefits of escrow? 

An escrow account ensures both parties are financially protected. Using an escrow company ensures funds are handled correctly. Usually, payment into this account comes from both the buyer and the seller, which encourages accountability on both ends. 

Having an escrow account is a vital part of the home selling and home buying. Speak with a trusted real estate agent and escrow officer to better understand your options.

About the Author
Author

Wendy Wiegand

As a premier real estate agent in Carlsbad, I’m here to provide you with all the resources and information you need to buy or sell real estate. I work with buyers and sellers in Carlsbad, Encinitas, Oceanside, San Marcos, Vista and the surrounding areas and I’ve had extensive training in the latest real estate marketing strategies.  I’m confident that I can offer you knowledge and tools most other agents can’t.

I believe in service, both to my clients and our community. When working with clients, you can be assured I am focused on providing the most comprehensive and dedicated effort so that you can achieve the best results possible when buying or selling real estate. I am also deeply involved in serving our community, as you and I all call it home. I have been a member of Rotary since 2003, have been an active member of the Carlsbad Chamber of Commerce since 2006, and serve on the board of the Agua Hedionda Lagoon Foundation. Perhaps my even deeper service to my clients and our community is Wiegand Realty’s participation in Business for a Cause.

Contact me so I can keep you updated on the latest real estate activities in our community and answer any questions you may have.

Thanks and I look forward to assisting in all of your real estate needs! 

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