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What is an escrow in real estate?

On Behalf of | Dec 30, 2021 | Residential Real Estate

Individuals who are looking to buy a home in Massachusetts will likely come across the term “escrow” from time to time. Generally, escrow is the term used to describe when funds are held by a third party while waiting for something to happen, or for “conditions” to be met. In a real estate transaction, escrow can protect the interest of various parties:

  • The buyer: When a down payment is made by a buyer, the deposit is overseen by an escrow agent and released when everything goes as planned in a purchase. For the buyer, this ensures the seller meets the terms of the agreement before the deposit is paid.
  • The seller: Holding the deposit is also an escrow to protect the seller. Should a buyer violate the contract, the funds may be available to pay for the seller’s losses, including lost time and trouble.
  • The lender: Mortgage escrow is another type of escrow, one that intends to protect the lender. This involves putting collateral in place, so a lender will be able to recoup its costs if a person does not pay the mortgage as agreed. Since the collateral in these cases is the home, the buyer is typically also required to maintain home insurance and property taxes so that the value of the home itself is protected.

In short, escrow is a key part of how real estate transactions work. They serve to both protect all parties and to motivate individuals to keep their commitments and obligations. Those with questions about escrow and how it might impact their transaction should discuss their questions with a Massachusetts real estate lawyer.