Now most if not all of us have made some sort of bet with a friend before. You may have asked a third party to hold the cash until the deal was decided and done. By taking out a mortgage to purchase a home your doing something very similar by using an escrow account.

When a check is deposited into escrow it is held by a third party who works for the borrower and lender. The agents role is to follow the orders agreed upon (Terms Of The Contract) and the money will be released when the terms are met. Escrow accounts can be used on a variety of purchases ranging from million dollar building projects to online auctions.

As far as real estate is concerned an escrow deposit is normally held by the sellers broker but can be held by the buyers broker at a buyers request. Some lenders require an escrow account to be opened to cover home owners insurance and property taxes. A initial deposit will be made followed up with payments to the account every month. In almost all cases your home owners insurance and property taxes will be calculated into your monthly mortgage payment. When the time comes an escrow agent will release the funds to the proper recipients.

In a perfect world this ideally protects the lending institution by ensuring that your taxes and insurance are paid on time. If for some reason a property owner falls behind on property taxes their local government can put a lien on the home, therefor throwing a major hurdle in front of a homeowner looking to sell. If a home was ever to burn down or flood then a owner who is delinquent on home owners insurance could leave a bank with no collateral.