How Escrow Accounts Work

An Escrow Account is a savings account where you deposit money for paying off your home insurance and taxes. The lender who loans you money for the mortgage opens the account. Once you have paid a percentage of the mortgage amount, without defaulting on the payments, then the lender might decide to excuse you from any further payments through the Escrow Account.

Another type of Escrow Account is maintained by an Escrow Agent as part of an agreement between the agent, the buyer, and the seller. The account is maintained until the conditions of the seller are fulfilled. The buyer regularly transfers funds to the Escrow Account and the agent hands over the accumulated amount to the seller in due time.

The escrow agent may either be a person who specially deals in escrow accounts, or an attorney. Why Have an Escrow Account? An Escrow Account is meant to protect the lender, more than anything else. An earthquake or accident may destroy your property, leaving the lender without the collateral on which you borrowed from him or her. If your property is insured, then the lender can breathe easy knowing that he will not lose out in case of an accident. Similarly, if the state confiscates your property because you were unable to pay taxes, the lender loses the collateral. Therefore, the lender want to make sure that you pay your taxes on time.

When an Escrow Account is opened for you, you have to regularly deposit money into it to pay your taxes and insurance premiums. Escrow Agents Most buyers and sellers of property, valuable real estate or art prefer to deal through an intermediary called the escrow agent. The escrow agent oversees the implementation of the deal between the buyer and the seller. He sees to it that the buyer puts the agreed amount of money in the Escrow Account, and then hands it over to the seller when the time for payment comes. Escrow Agents can be attorneys, real estate agents or even software source code escrow agents. Online Escrow Services To make escrow transactions easier in the digital age, online escrow services have sprung up.

These agents allow remote buyers and sellers to conduct transactions online. Since there are high chances of fraud on the part of the buyer and seller when they are geographically distant, online escrow agents work as reliable intermediaries. Guidelines Regarding Escrow Account Escrow Accounts are based on certain guidelines put down by the authorities concerned.

In the US, the Real Estate Settlement Procedures Act restricts the amount that can be put into the Escrow Account. For example, there must be at least one day in the year when the amount in the Escrow Account is no more than one sixth of the total you owe in insurance premiums and projected tax amount. If your mortgage or any other transaction involves an Escrow Account, it becomes necessary for you to start planning how you are going to save for that account. If you find it difficult to understand the nuances of the Escrow Account, or are unsure of the implications of the account on your income and business, then you can approach an Escrow Account consultant for help. The consultant will guide you to the best options you have, and ensure that the Escrow Account does not become a liability for you.

David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site


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