What is an escrow account?

Definition of Escrow Account

In real estate, an escrow account is a separate account that is used by an official, such as a lawyer or your lender, to hold funds on your behalf to pay a third-party, once conditions are met.

For instance, your mortgage lender may include property taxes in your monthly mortgage payment. This money will be kept in an escrow account. When it’s time to pay property taxes, your lender will then take the money to pay your municipal tax department on your behalf.

Why is this term important?

Escrow accounts are important as it enables a homeowner to pay smaller, monthly sums of a larger expense, such as annual property taxes, to a legally responsible third-party. This third-party will then pay the full amount collected towards the expense, which either eliminates the debt or significantly reduces the amount owed by the homeowner.

While escrow accounts are commonly used to collect and allocate funds, these accounts may also be used to hold legal documents that are integral to purchase and sale agreements that are in process.

Examples of term

For instance, a lawyer will hold the deposit from a buyer in an escrow account until the sale of a property is finalized. Once all conditions of a sale are met and the title has been signed and delivered to the buyer, the lawyer can then remove the funds from the escrow account and forward the money to the seller or the seller's legal representative.