Escrow is a third-party arrangement that holds funds or documents until conditions are met. It protects both parties in a transaction. The buyer deposits the money with the escrow agent. The seller transfers the asset. When the conditions are satisfied, the agent releases the funds to the seller. If the conditions are not met, the funds go back to the buyer. Neither party can access the money until the deal closes.

Escrow is common in real estate. When you buy a house, your down payment and closing costs go into escrow. The escrow agent verifies the title, coordinates with the lender, and ensures that all documents are signed. At closing, the agent disburses the funds to the seller, the lender, and other parties. The process takes weeks, and the escrow agent charges a fee, usually a few hundred to a few thousand dollars.

Escrow is also used in mortgage servicing. Lenders often collect property taxes and insurance premiums monthly along with the mortgage payment. They hold that money in an escrow account and pay the taxes and insurance when they come due. That protects the lender's collateral. The borrower does not have to budget for large annual bills. But the lender controls the funds, and the borrower may not earn interest on the escrow balance.

Escrow is used in other transactions too. Online marketplaces use escrow to protect buyers and sellers. M&A deals use escrow to hold back a portion of the purchase price against potential claims. The principle is the same: a neutral third party holds the money until the deal is done.