When I refinanced my house a few months ago, one move saved me thousands of dollars on closing and continues to save money. This move was confident that I would have enough capital in my refinancing to eliminate the need for an escrow account. People usually assume they need an escrow account, but that might not make sense to you.
What is mortgage escrow?
An escrow account, in the case of a mortgage, functions as an intermediary between the homeowner and the tax authorities, insurance companies, or anyone else the homeowner designates to pay with the funds held in it. This is usually a mandatory savings account attached to a larger mortgage payment. Mortgage escrow services are popular with mortgage lenders as they prevent foreclosure due to non-payment of property taxes.
Why did I give up my escrow option?
Some of the disadvantages of escrow are:
· When buying a home, upfront escrow financing can add several thousand to the closing costs, which, if financed through a loan, could cost you years to come.
· Generally, an escrow must maintain a minimum balance, and if taxes and fees are higher than the estimated, the escrow amount may grow to replace that minimum balance, which means your mortgage payment will fluctuate.
· Most escrow accounts do not carry any interest to the owner. If you have to pay a significant amount of real estate tax, imagine an account that holds thousands of dollars and does not pay interest.
Escrow accounts can create a “credit card effect”.
When I finished refinancing, I set up property and accident insurance to auto pay. I also started making a monthly deposit into a savings account to cover real estate taxes. Faced with these actual costs, I took the extra step and made a purchase at cheaper prices. insurance cover and appeal my tax assessment. Both attempts have brought us substantial savings.
For me, the escrow account served as a buffer, allowing me to fully understand the total cost of housing. As when using credit card can lead to excessive spending, using an escrow account made me much less aware of exactly how much I was paying for insurance and taxes. It is not the escrow’s fault that I paid more than I needed. It was my responsibility, but the lack of escrow put me face to face with the reality of what I was spending on insurance and taxes.
Escrow is not all bad.
There are good reasons to keep an escrow:
· If you do not know how to save on big expenses, it can save you from yourself. Rather than taking individual steps to keep property taxes and insurance separate, these costs are included in one payment.
· You may receive a slight reduction in your mortgage rate for maintaining an escrow account. The lender benefits from having an escrow for taxes and insurance because it protects them from the risk of the collateral for their loan (your home) being auctioned off by the county if the costs are not paid. (It’s also worth mentioning that they probably make money as a percentage of the money that also accumulates in your account.)
· This reduces the likelihood that the property will not be insured against disaster in the event of a missed payment.
So, should you try to opt out of using an escrow account?
It depends on your situation. If you do not refinance your home, once you pay for the home below 80% of the loan value, you will be able to request the removal of the escrow, but some lenders may charge a fee for this. Be aware that there is no escrow just to protect the lender. If you choose not to deposit a deposit, you must be very confident in your ability to save on property taxes separately.
You may also want to consider automatically writing off your premiums so you don’t forget. You may be able to save on insurance by paying it out in a lump sum, so saving on an annual payment and then paying it back can provide some savings as well. If you are in a situation where you have more than 20% of your home equity and you are confident that you can maintain discipline in paying insurance and taxes, then leaving an escrow can save you a lot in the long run.