Final answer:
Escrow money in real estate transactions includes both earnest money and escrow funds. Buyers can potentially receive their earnest money back if the deal falls through for specified reasons. Escrow funds are used to cover ongoing expenses like home insurance and property taxes.
Step-by-step explanation:
Escrow is a concept commonly used in real estate transactions. It is a neutral third party that holds money on behalf of the buyer and seller until the transaction is completed. There are two types of escrow money involved in a real estate transaction - earnest money and escrow funds.
Earnest money is a deposit made by the buyer to show their sincerity and commitment to purchasing the property. If the buyer decides to back out of the deal for reasons not specified in the contract, the seller may be entitled to keep the earnest money. However, if the deal falls through due to contingencies outlined in the contract, such as a failed inspection, the buyer can typically get their earnest money back.
Escrow funds, on the other hand, are typically used to cover expenses like home insurance and property taxes. These funds are held in an escrow account and released to the appropriate parties when payments are due. So, although the buyer does not directly receive their escrow funds back, they are used to pay for their ongoing expenses related to the property.