Escrow is a risk management device used in many real estate and other financial transactions to reduce the exposure of both the buyer and seller. You may be familiar with it if you've bought a house or purchased homeowners insurance in the past. However, if you have not encountered escrow before, the following information should bring you up to date.

What Is Escrow?

Escrow is the use of an independent third party who acts as an intermediary during a financial transaction. The buyer writes a check and deposits it with the escrow officer. The officer does not release the funds to the seller until he or she verifies that all conditions of the sale have been met.

This way, the buyer faces no risk that the seller might cash their check and skip town. Meanwhile, the seller faces no risk that the buyer will take possession of the property but not pay for it. It is a mutually beneficial arrangement.

What Are Some Uses of Escrow?

The most common use of escrow is for real estate transactions. Because large sums of money are at stake, it makes sense for the parties involved to protect themselves using an intermediary. For instance, the buyer writes an "earnest money" check to indicate that they are serious about the purchase. The check is placed in an escrow account until certain conditions are met, such as a successful home inspection or completion of certain repairs.

Escrow is also used for online purchases where buyers and sellers are relatively anonymous. It provides certainty for both parties. Another common use is as a repository for homeowners insurance and property tax payments. Home buyers send a single mortgage payment check to their bank, most of which covers the principal and interest on their loan. The bank places the remainder in an escrow account, from which taxes and insurance are withdrawn as needed.

If you are in the market for homeowners insurance to protect your largest investment, contact First State Insurance Agency in Beatrice, David City, Hickman, Lincoln, Wilber, or Yutan NE. Along with homeowners insurance, they also specialize in business, life, crop, and auto insurance. Visit their website to get in touch with them online or call (402) 979-7585 to request a free quote.