- Real Estate
Pros and Cons of Mortgage Escrow Accounts
If you have a mortgage on your home, then I am sure you have heard the phrase "escrow account". Most mortgage companies require them unless you have a substantial down payment on the home. Many require them no matter what. But what exactly is an escrow account and what are the pros and cons of one? Let's take a look.
An escrow account is an account held by a third party to hold something of value in safe keeping until it is needed. Essentially the mortgage companies and/or the government do not trust home owners to pay their property taxes or insurance on their own, so they require that the money be paid as part of the monthly mortgage payment and set aside to pay the taxes and insurance when it comes due. The financial company that holds your mortgage will set aside the money for the taxes and mortgage each month then pay these things for you.
Unfortunately the mortgage companies and government are many times right when it comes to people paying their property taxes and insurance. These things are a lot of money - thousands of dollars at a time - and most people do not have the discipline to set aside money each month to pay these when they come due. And if they do set the money aside, it is very tempting to spend it on something else while it is accumulating.
The pros of having an escrow account is that the money needed to pay property taxes and insurance are paid each month as part of your mortgage payment so it is set aside to pay the bill when it is due. It is out of your hands and you don't have to think about it. This is much easier for some people. They don't have to worry about these bills each year it is just taken care of by the mortgage company.
There are cons of an escrow account too. You have no control over the escrow account. While we had a fixed rate mortgage on our last home, our mortgage payment was fluctuating yearly because the mortgage company could not figure out the appropriate amount needed for our escrow account. This made budgeting difficult. Many times the mortgage company is required to have extra set aside in the escrow account to cover increases. So more of your money is being held by the bank than needs to be held. I would prefer to have access to my money.
Another con of an escrow account is you can't control when and if the mortgage company pays the insurance and property taxes. I know several people that have had trouble with their escrow accounts. Checks from the mortgage company have bounced, payments have not been made on time and home owners insurance has lapsed, property taxes were just not paid, etc. Mistakes happen. I would prefer to have control over how my bills are paid and not trust a financial institute to do these important tasks.
Most mortgage companies require an escrow account and when we got our last mortgage we had to search hard to find a company that would let us handle the insurance and property taxes on our own. Even then, some companies wanted us to pay a several hundred fee so that they didn't have to do this. We were able to get that waived, fortunately and I like handling this on my own. But it isn't for everyone. If you can't totally trust that you will set aside money each month to pay your own taxes and insurance, then you should probably go for the escrow account. They can be very beneficial.