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What is escrow? A beginner's guide

by Vincent Zhang 05/13/2024

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

Vincent Zhang

I am a real estate broker, property manager, and investor, located in Ann Arbor, Michigan. To each client, I bring close to a decade of experience in real estate, first as a real estate investor, then manager, and now love to share my experience and knowledge with property buyers and sellers as a real estate broker. Since attending the University of Michigan in 2005, I have lived in Ann Arbor ever since. My exceptional knowledge of the market as an investor and property manager provides a unique perspective and competitive advantage to my clients for selling and buying both residential and investment properties.

I have successfully managed investment properties in Ypsilanti and Kalamazoo and have conducted real estate transactions throughout southeast Michigan. Whether clients are looking for their first home, vacation homes, or the home of their dreams, I will be able to stay on top of the process, remove obstacles and make the real estate deals as pleasurable as possible. I enjoy working with people and finding ways to share a laugh or two in the process. I take pride in being available to my clients and being responsive to their needs.

In addition to my residential property expertise, and my multicultural background, I am capable of working with international investors and home buyers to make their international property purchases smoother and trouble-free. If you are interested in the acquisition of investment homes for your children while they attend the University of Michigan, as a property manager, investor, and broker, I will be able to help you make that reality come true.

I graduated from the University of Michigan and own and operate several businesses in Ann Arbor and Ypsilanti. In addition to my real estate experience, I am also a technology enthusiast and am always on the hunt to use technology and media to enhance the buying and selling experience. 

If you are looking to make your first home purchase, or are trying to sell your home, give me a call and I can guide you through the services that I can offer you to help you start along the journey. I take great pride in my work and it would be an honor for me to represent you and your needs.

Yours truly, Vincent Zhang