Final answer:
Earnest money can be placed into an interest-bearing account during a real estate transaction when both parties agree and an escrow service manages the account. This is a good strategy when the transaction's closing is several months away, and a certificate of deposit could be suitable if the terms match the closing date.
Step-by-step explanation:
The question relates to the appropriate time it is permissible to deposit earnest money into an interest-bearing account during a real estate transaction. It is typically permissible to place funds into such an account when both the buyer and seller agree to the arrangement as part of the sales contract, and when the escrow holder, who is a neutral third party, follows the regulations and requirements pertaining to escrow accounts. This practice becomes especially sensible if the closing date is set several months in the future since the money would otherwise sit idle.
An interest-bearing account suitable for these purposes could be a simple interest-bearing escrow account or potentially a certificate of deposit (CD), provided that the terms of the CD match the timing of the real estate transaction. It's important to note that CDs typically lock in the deposit for a set period and withdrawing funds early can incur a substantial penalty. Hence, the term of the CD should align with the expected closing date. The escrow service would be responsible for managing these funds, ensuring that home insurance and property taxes are paid from this account as part of the normal monthly payment, if that's part of the agreement.