What is Escrow?
Escrow is a form of transaction where a middleman or third party is involved in handling the transactions between two or more parties. The word ‘Escrow’ comes from the French word ‘escroue’ which literally means a piece of paper, which signifies a deed which the third party ‘holds on to’ until a transaction is finalized.
In the United States, escrow is generally used in real estate. Escrow usually pertains to the expenditures that come with the house above and beyond the value of the physical property, such as taxes and insurance. In real estate, an escrow account will hold money that will guarantee that payments for requirements such as property taxes and hazard insurance will be met. This escrow account is usually a requirement before mortgage loans can be secured.
Another commonly used term bearing escrow is the escrow fund. This is usually applicable to payment for damages resulting from a lawsuit. For instance, oil giant BP has already agreed to a $20 billion escrow fund to be paid out to the victims of the oil spill. The fund will then be transferred to a third party administrator who will take care of distributing the fund to the victims of the oil spill.
Escrow can also be applicable to simpler situations such as in ATM banking deposits or in vending machine payments, where the money is held by the machine until the customer presses OK on the transaction.