Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The escrow agent has the duty to properly execute the obligations under an escrow agreement.
When buying a property, for instance, the buyer might place the funds in escrow until specified conditions are met, such as the completion of a property inspection or other due diligence activities. The escrow agent then releases the funds to the seller once these conditions have been met.
In addition, escrow accounts can be used to hold and manage funds that are used for paying ongoing expenses related to the property, such as insurance and property taxes. The lender or mortgage servicer may require these funds to be held in escrow to ensure these costs are paid on time, reducing risk.
In essence, escrow helps make transactions more secure by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the escrow company.