The Advantages of the Escrow Account
An escrow account is added to your mortgage by the lender as a place to save up your property taxes and homeowner's insurance payments. The lender uses the annual tax estimate and insurance premiums to determine how much is required per month to pay those bills, and then that amount is added to your mortgage payments. Using an escrow account can make owning a home easier.
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Convenience
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An escrow account combines all of your tax bills and your homeowner's insurance premium into a single monthly payment. You don't need to wait to collect your tax bills and then try to save the funds to pay them. An escrow account removes the responsibility of paying your property obligations from you and rolls it into your monthly mortgage payment.
Budgeting
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When you figure your monthly mortgage payment into your personal budget and you have an escrow account, there is no need to save for individual tax or insurance payments. You can use a single and consistent budget number each month to pay your home loan, taxes and homeowner's insurance. If you did not have an escrow account with your mortgage, you would have to create one anyway to pay your taxes on time and in full.
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Penalties
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An escrow account administered by your lender pays your tax and insurance bills on time, which prevents you from running into tax problems such as added interest, penalties and the threat of property foreclosure for failure to pay property tax. If you don't have an escrow account and you allow your homeowner's insurance to lapse, you are denying yourself coverage in the event your home is damaged. You may also run into problems with your mortgage company as homeowner's insurance may be an obligation to maintaining your home loan.
Loan Approval
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When you are applying for a home loan, agreeing to an escrow account can be part of the approval process. The lender considers your home to be collateral for approving the loan. Agreeing to an escrow account means that you are allowing the bank to maintain the insurance and tax obligations on its collateral by making those protections part of your monthly payment.
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