What Is Escrow And When Is It Necessary?

Where does your money go when it’s “in escrow?” Who’s in charge of it? Does it mean you’re in trouble? It sounds like you’re in trouble. The money still exists, right?

Even if you’ve never had to deal with escrow before, you probably will at some point. If you’re buying a home or dealing with a problematic landlord, escrow might come into play. You might also hear the term if you’re buying or selling just about anything of value: a car, a boat, a work of art. If considerable money and assets are changing hands, don’t be surprised if “escrow” comes up.

But what is it? Think of it as money limbo, but more like a helpful money limbo. When your money is in escrow, it just means that an impartial third party is holding onto it for safe keeping. This typically takes place when you’re exchanging money for something valuable, to keep the buyer and seller honest until the transaction is official.

How escrow works for home buyers and sellers

When you’re buying a house, you might place your money in escrow to ensure that the seller is going to accept your offer and complete any terms of the sale, like repairs. At the same time, the seller might put the deed to the home in escrow. Once the deal is finalised, the seller gets the money, and you get the deed. Escrow officers make sure the transaction timing goes smoothly.

Your lender may also maintain an escrow account for you. Some lenders can collect funds each month for bills like property taxes and then submit those payments when the due date approaches. Your lender is saying, “We’ll hold this money until you need it, but we won’t use that money for our business.”

How escrow works for renters and landlords

Now, you might be thinking “Hey, I don’t have much of value. This doesn’t apply to me.” But even if you’re just starting to build your financial foundation, you might encounter escrow.

Say the heater in your apartment breaks and your landlord says they’ll fix it. But that was November, and now it’s December. It’s a problem. If your landlord violates your basic needs for safety and comfort, you can withhold your rent payments. But you don’t do this by simply ignoring the first of the month and spending that money. Instead, you can apply to pay that rent to escrow through your local court system.

But you have to do it the right way — you must provide written notice to your landlord before applying to pay into escrow. But it’s a last resort you should be aware of if you have a landlord who’s notoriously hard to reach.

The bottom line: If you’re dealing with money in escrow, it’s because both parties want to make sure the transaction is completed fairly. You’re not in trouble, and your money still exists.