Should I Include Escrow in My Mortgage Payment?

Escrow impound accounts have both advantages and disadvantages.

Escrow Impounds Benefit New Homeowners

Homeowners unaccustomed to paying real estate property taxes---and saving up for them---benefit from escrow impound accounts. A portion of the annual property tax bill (1/12) is added to the mortgage bill each month.The lender saves the money in a bank account and pays the bill on the owner's behalf. Owners and lenders benefit from the convenience of sending a lump sum to the lender each month and not having to worry about having the money when the bill arrives, or paying it late.

They Don't Pay

Some states require lenders to pay interest on the money held in escrow impound accounts. However, the rates are typically very low. A financially savvy borrower will earn more by forgoing the lender's escrow account and putting the money in a high-interest-bearing account. Also, lenders often collect a cushion, an amount in excess of the actual tax bill, to ensure there is enough money to pay the taxes if the homeowner misses payments.

Bottom Line

If the lender requires you to open an account because you are a first-time buyer or have a high-loan-to-value loan (one that equals or exceeds the value of your home), it may be better to do so, because the lender will often require you to pay a fee to waive the escrow requirement. Unless you can earn sufficient interest elsewhere to offset this cost, it's worth it.

References

• Esrow Help: Escrow Impound Accounts: Do You Have a Choice?

Resources

• HUD: FAQs About Escrow Accounts for Consumers