What is an Escrow Account?

What is an Escrow Account?

An escrow is a financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction. It helps make transactions more secure by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the escrow company.

Understanding Escrow

Buying a House, built a Web site (transaction where a large amount money is involved, a certain number of obligations need to be fulfilled before a payment is released). Are you opting for a construction-linked plan? Or built a Web site? The property or the Web site isn’t ready so you don’t have to pay the whole amount. The seller, however, would need an assurance that the amount will be disbursed, and in this case it makes sense to create a central (Account) where the funds are held. All that brings us to Escrow Account. An escrow account is a temporary pass through account held by a third party during the transaction process between two parties. Escrows operate until a transaction process is completed after all the conditions between the buyer and the seller are settled.

From an escrow account, the amount is not transferred to the seller until the project is completed. Often the construction-linked payments are disbursed to the seller from the escrow account so that there are sufficient funds for completing the project.

The seller benefits through this process, also called waterfall mechanism where in the priority based payment are made to the parties concerned.

Escrow Account reduces the risk of fraud by acting as a trusted third-party that collects, holds and only disburses funds when both Buyers and Sellers are satisfied.