One of the most important decisions when buying a house is how you will pay your insurance and property taxes each year. Depending on the type of loan you have received, an escrow account may be the right decision for you.
What is an escrow payment?
An escrow payment is a portion of a mortgage payment that is set aside in an escrow account. The escrow account holds money owed for your expenses such as insurance premiums and property taxes. The borrower pays an additional fee on top of their monthly expenses. This money gets put into an escrow account. At the end of the year, the lender accesses the account to pay for the year’s taxes and homeowner’s insurance.
Do I have to escrow?
In most cases yes, you have to escrow. But there are some circumstances in which you don’t have to. Some lenders allow you to pay your own insurance and taxes, especially if you have a very high loan-to-value ratio. Although, your lender might increase your interest rate if you don’t do the escrow payments as compensation. If you already have a loan with escrow it is very difficult to convince your lender to cancel it.
Should I escrow?
There are pros and cons to having an escrow account, but it really depends on you and your situation.
- No lump sum. Having an escrow account means that you will not have to worry about paying one large sum at the end of the year for your tax and insurance. However, your monthly payments will be higher than they would be without an escrow account.
- Financial stability. You can never be certain if your financial situation will be the same at the end of the year as it is in the beginning. Having an escrow account allows you to dedicate small increments of money throughout the year instead of having to pay it off in one large sum at the end of the year.