What is an escrow account and how does it work?

An escrow account is a neutral third-party account that holds funds or assets until specific conditions of an agreement are met. It protects both parties in a transaction by ensuring money is only released when obligations are fulfilled. In real estate, for example, a buyer deposits funds into escrow when making an offer. A title company or escrow agent holds the money until closing conditions are satisfied, then releases it to the seller. Escrow accounts are also used by mortgage lenders to collect monthly payments for property taxes and homeowners insurance, holding those funds and paying the bills on the homeowner's behalf when they come due. This ensures those critical payments are never missed.