An escrow account is an account set up by your lender that sets aside a predetermined amount of money that comes directly from your mortgage payment. That money is then used toward your property taxes and property insurance payments. There are certain benefits that borrowers realize by taking advantage of this type of account. It is not mandatory for all loans, with the exception of those that are over 80 percent loan-to-value ratio. Whether or not you are required to have an escrow account depends on your LTV, credit history and the rate that you are being charged, as not having an escrow account does pose a higher risk for the lender. Whether or not you are required to have an escrow, there are definite benefits of having one:
- The budget is done for you. It is no secret that property taxes are costly in most areas; they can be $1,000 or more per month in some areas of the country. This can be a costly amount to need to budget every month or if you are not good at budgeting, it could put you in a financial bind when the time comes to pay the lump sum taxes. An escrow account takes the budgeting out of the equation, with the exception of making sure that you have the money every month to make your full mortgage payment. Not paying your portion of the escrow each month is not an option – if you choose not to pay it, your mortgage will begin to report late on the credit report.
- Having your taxes and insurance paid on time can save you money. If you are not good at remembering due dates or budgeting for that matter, and you pay your property taxes late, you are going to be charged hefty penalty fees. These fees continually increase the later that the taxes become. If this occurs, you are essentially paying much higher rates than necessary for your taxes, which an escrow account could have prevented.
- Protection against large increases in taxes. Every countyreassesses home values periodically. With a reassessment could come higher taxes. If you are not prepared for this increase, it could put you in a financial bind when it is time to pay your taxes. If you have an escrow, on the other hand, you will get fair warning that your escrow amount is going to change. This typically comes with your yearly escrow analysis. After the analysis, you are usually given a month or two to prepare for the new payment. The benefit of having the increase buried in your escrow payment rather than as a lump sum tax payment is that the amount is spread out over a period of a year, which typically does not mean a drastic change to your monthly payment.
- Having your taxes and insurance paid for you is convenient. If you are busy or not the type to keep careful track of your bills, especially those that only occur twice a year, it can be worth the monthly payments simply to pay for the convenience of someone else paying your property taxes and insurance for you. It takes the burden off of you and allows you to know that your payments are being made on time.
- Your interest rate will likely be lower than a borrower that does not have an escrow account. Waiving escrow accounts put the banks at a higher risk than those that have an escrow account. If you default on your property insurance or taxes, it puts a lien on your property and puts the bank at risk. Most banks reward customers that have an escrow account with a slightly lower interest rate.
There are definite benefits of having an escrow account. Unless you have large sums of money already set aside for your property taxes, it is beneficial to keep your escrow account on your loan. Most mortgage companies do not require monthly payments that are much larger than the actual cost of the taxes or insurance, making it wise to keep an escrow account. The only downside is that you are not receiving the interest on the money that is set aside to pay these fees, but the benefits typically greatly outweigh that disadvantage. In addition, the lower interest rate that you are able to obtain on your mortgage typically washes out the interest that you would have obtained had you put the money aside in a savings account yourself.Click to See the Latest Mortgage Rates»