Escrow

In general, the term escrow is used to refer to the practice whereby a third party holds money or items involved in a transaction until a condition has been fulfilled, upon which the escrow agent transfers the money or item to one of the parties to the transaction. Naturally, there is a certain amount of overhead involved in escrow arrangements and so they tend only to be used for high value transactions. In real estate transactions, escrow might be used to make sure that title deeds for a property are only transferred once a payment has been made, for example.

Another common usage of escrow within the real estate business refers to the practice of getting home-owners to make advance payment on real estate taxes or insurance. Often, the financial institution which lent money for initial mortgage on the property will make such escrow payments a condition of the loan. These are particularly common in cases where the home-owners only put up a small percentage of the total property price.

Typically, the home-owners will be required to pay one twelfth of their total yearly real estated-related tax and insurance bill into the escrow account which is controlled by the mortgage company. The mortgage company will then make the payments on behalf of the home owners, but only once per year. Usually, no interest is paid to the home owners on these advance payments. Thus, the arrangement can be very profitable for the mortgage companies.

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