What are escrow accounts?
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In mortgages an escrow account is extra money that is paid in and held by the bank to pay other things–such as property tax or homeowner insurance. My bank does this for me. It is easier to make one monthly payment to the bank who then disperse the money for me.
It is an account held by a third person in our exchange. So if I am buying something and you are selling something, like a car, then I would actually give the money to the escrow account until the car is delivered and I can make sure it’s as you described. You can see that I put real money into the account, so you ship the car, then I get the car and it looks good so then I release the money and you get it. It helps protect both of us.
It is even MORE common for mortgages (house loans). On top of the loan you also usually have to pay property tax and homeowner’s insurance. You can get an escrow set up with the loan bank so that you just make *one* mortgage payment a month – some of that money will go to the escrow which then goes to pay the insurance and the taxes. It is easier for *you* (you don’t have to manage three different bills) and it is safer for the bank (since they don’t have to worry about you missing a tax payment and then something happens to the property they also partially own).
It’s where money sits until a specific thing happens and the money is released.
A pretty common one is your mortgage lender may have set one up for you “for your convineince”, but mostly for their protection.
They have you pay into this holding account every month and then use that account to pay your annual home owners insurance and property tax for you.
They want to be certain these are paid to protect themselves.
An escrow account is not required, and you can opt to not use one if you are very confident you will set aside money on your own and not be suprised by these bills.
I don’t trust you. You don’t trust me. But we want to make a deal with a bunch of money involved, maybe.
Luckily we both trust a third party. You take the bunch of money and give it to the third party to hold on to until I do the thing. When I do the thing that third party will give me the money so you can’t back out, and if I don’t do the thing the third party gives you your money back so I can’t run off with it.
That money deposited with the third party is “escrow”, and when it is organized into an account it is an “escrow account”.
Escrow basically means held by neutral 3rd party. The most common types of escrow accounts are related to real estate — before and after purchase. During the “under contract” period, earnest money and down payment funds will be held in escrow. This proves the buyer has the funds while the seller cannot access until all parts of the contract are complete and deal closes.
Once somebody buys a home, their mortgage company typically holds money in an escrow account, collecting 1/12 of projected insurance and property tax each month to pay those bills when they come due annually or twice annually. The mortgage holder wants to make sure there are no issues of home owners not being able to pay a large bill when it comes due and putting their collateral at risk.
Most of the other responses are talking about escrows in relation to mortgages but they also apply to construction. Townships will sometimes require escrows for bigger peojects. Essentially its so they dont leave a giant hole in the ground if the owner goes bankrup. If they were to go bankrupt then the money could be used to get the project to a good stopping point.
Perhaps this brief video presentation will help … but probably not. [What is Escrow?](https://youtu.be/_3Dbxt4EAfY?feature=shared)
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