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What Is An Escrow?

An escrow refers to an arrangement by which the assets in a transaction are temporarily held by a third party and will only be released when all the agreement conditions have been satisfied. It serves to guarantee the safety of the transaction for both parties, and usually, money, assets, and other securities can be held in escrow. The handler of the escrow account generally charges a fee for the third-party service that they render.

Deeper Definition

The use of escrow accounts is encouraged in cases where a transaction with a high value is to go ahead, as in the purchase or sale of art or jewelry. Also, in cases where the buyer is unsure about the quality of work and needs assurances before releasing the payment or that where the seller is uncertain about the willingness or ability of the buyer to pay, the option of using escrow can be considered. As such, the two parties that have business dealings together and are uncertain about whether or not the other party will fulfill their contractual obligations are potential candidates for escrow accounts. Online transactions, banking, real estate, mergers and acquisitions, and so on are some of the instances in which escrow accounts can be used.

Escrow accounts are beneficial in cases where transactions are completed in stages, with each level unlocking the next. It is not a great decision to grant the other party full access to the funds before completing the job; therefore, the disbursement of the funds in batches that an escrow makes provision for is helpful once the milestones are attained. Some of the positives of using an escrow include protection for the buyer and seller during transactions that involve high-value commodities and the opportunity to avoid making lump-sum payments.

Escrow Example

In a case where a specific individual intends to buy a home, they would need to set up two escrow accounts. The first serves as a down payment, and the second to handle other bills that the mortgage would demand.

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