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Tuesday, November 24, 2020

Escrow Account- What are its Pros and Cons?

The escrow account is also known as an impound account. It is useful for both borrowers and lenders. It benefits the borrower with insurances and taxes at the time of budgeting. Primarily, it helps the lender by making the buying process secure. But, opening an escrow account is costlier and not everyone finds it is feasible.

Escrow Definition 

escrow project financeIn simple terms, escrow involves a third party to hold the escrow money or assets on behalf of the buying and selling parties which are processed after the transaction is finished. People use escrow in real estate transactions but it can be used in any situation where a big amount is involved.

Escrow Account Definition

An escrow account is the account of the third party, who holds the assets for the buyers and sellers till the transaction is completed. Hence, the third party in a trust account will secure the funds for the other two parties.

Related Article: What does ACH Network mean? The Fundamentals

Pros of an Escrow Account

escrow finance

  • On having an escrow account, the person who opens it is eligible for a discount on closing costs or interest rates.
  • It is the lender who is responsible for the payments. The lender will make the property tax payments and homeowner’s insurance automatically.
  • The payment for interest mortgage and the monthly principal is automatically done at the end of every month. There is no need for the buyer to keep the payment aside.
  • It makes the whole transaction safe and contracts involving big amount becomes easier when this third party is involved.
  • There is no requirement to make the payment at once. The buyer can make it in instalments as well, i.e once or twice a year. Depending on the insurance provider, one has to decide to pay the insurance premium once or twice a year.

Cons of an Escrow Account

what is escrow service payment

  • On opening the escrow account, the funds get blocked. The seller or buyer doesn’t earn interest on it and can’t use it until the transaction is completed. However, if the money is in direct control, putting it in the savings account can help earn extra interest.
  • It might be required to deposit property tax for several months, depending on the time of the year at which the escrow account is opened.
  • After the first year when the account connects with the mortgage account, a lot of fluctuation exists even with a fixed interest rate. 

Also Read: PayPal for Business: How to make the most of it?

In the end, it depends on the buying and selling party, whether they want to take the escrow account service or not.


Kiara Dutta
Kiara Dutta comes from an Engineering background, with a specialization in Information Technology. She has a keen interest and expertise in Web Development, Data Analytics, and Research. She trusts in the process of growth through knowledge and hard work.

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