An escrow account is an account designed to safely hold funds temporarily. The escrow provider should be a disinterested third party with no preference about who ultimately receives funds from the account.1 For example, in a real estate transaction, the escrow account does not belong to the buyer or seller. Escrow accounts are useful in several ways:
- Buying goods and services: Escrow is an option for almost any transaction where buyers and sellers want a “referee” to oversee payment.
- Home-buying: An earnest money deposit should stay in an escrow account to protect both the buyer and seller.
- Monthly payments: A homeowner might make deposits into an escrow account with each monthly payment, helping to smooth out large annual expenses.
- Renters and landlords: Escrow accounts can help protect the interests of renters and settle disputes.
We’ll cover each of these in more detail, but the common theme is using an account to hold money for safekeeping.