A restricted escrow account is a third party that handles the transactions of the other two parties. The use of such an account is advantageous to both the payer and the receiver. It helps the payer budget out lump-sum payments over the long term, and enforces payment on behalf of the receiver. Restricted escrow accounts are common in real estate transactions as well as cash settlements.
A regular escrow account acts like a middleman. When a buyer purchases a good or service, he will deposit the money in an escrow account until she receives her purchased good. The seller will only release the good when he sees that the buyer has put the money into the escrow account. When the seller receives the good, the escrow company releases the funds to the seller. A buyer and seller will thus use an escrow account for the safe passage of funds, without the fear of one party taking advantage of the other. Escrow accounts are a method of fraud prevention.
Defining Restricted Escrow
A restricted escrow account works like a regular escrow account, but is "restricted" for the payments of one type of good or service. Instead of fraud prevention, the sellers of a product will use a restricted escrow account for the means of knowing that payment is guaranteed for the future. At the same time, it helps the buyer budget out her payments over the long term. Take, for example, a buyer who owes $120 to a seller at the end of the year. By depositing $10 into a restricted escrow account, the seller can feel more confident that he will receive $120 after 12 months. If the buyer misses a payment, the seller can demand the payment into the restricted escrow account before taking legal action.
Use in Real Estate
Restricted escrow accounts are common in real estate transactions, especially mortgages. In addition to the monthly payment on the principal and interest on a mortgage, a portion of the borrower's payments are also put into a restricted escrow account. The payments put into escrow go toward mortgage insurance payments, house insurance payments and real estate taxes. As these charges are often made on an annual rather than a monthly basis, a continual deposit into an escrow account will give the mortgage company some assurance that the borrower will complete a full payment of mortgage insurance and home insurance.
Use in Lawsuits
An escrow account also comes into use in lawsuits where there is a cash settlement. The escrow company takes the responsibility for the collection of payments from the defendant, and then distributes the funds to the plaintiff. This way, the plaintiff does not have to worry about collecting the funds himself. As in the case of real estate transactions, the restricted escrow account serves to collect funds on a periodic basis until the defendant reaches the full outstanding balance. In this case, the escrow company has the legal power to collect any unpaid sums.