I pay only principal and interest and take care of my property taxes and insurance directly. That's because I waived escrow -- and I actually paid a fee to do so. There are a few good reasons why I did this, which are worth considering if you're thinking about doing the same. But there's also a big downside to waiving escrow. There are three reasons why I chose not to use an escrow account and instead pay my taxes and insurance myself. When you pay your taxes and insurance through an escrow account, you pay the same amount to your mortgage lender every month.
I prefer to have more flexibility in my budget, rather than raising my monthly payment by a uniform amount. Three of the bigger ones? Property taxes, homeowners insurance and, for many buyers, private mortgage insurance. So the question is: Do you trust yourself to save up the money to make these payments on your own? Or would you rather have your mortgage lender collect the money to pay for your insurance and tax bills each month and then make the payments on your behalf?
If you choose the latter option, you'll enter into what is known as an escrow agreement with your mortgage lender. Under an escrow arrangement, you'll send in extra dollars with each of your monthly mortgage payments. Your lender will deposit this money into an escrow account. When your property taxes or insurance bills are due, your lender will use this money to pay them on your behalf. This is convenient. But not every home buyer wants an escrow arrangement.
Some want to pay their property taxes and insurance bills on their own, arguing that they'd rather have a lower monthly mortgage payment or that they can make better use of their dollars than watching them sit in a non-interest-bearing account managed by their mortgage lenders.
These are not small bills. You don't want to be surprised when the bills come. Consumers don't always realize all the pieces that go into their monthly mortgage payment. Titsworth and other mortgage pros use the acronym PITI to explain it: If you have an escrow agreement, your money each month goes to pay off your mortgage loan's principal balance, interest, taxes and insurance -- or, PITI.
When your insurance bills and property taxes are due, your lender dips into your escrow account to pay them for you. You don't do anything, except contribute the necessary dollars with each mortgage payment. He has a point. Tax bills and insurance payments can sneak up on homeowners if they're not disciplined enough to stow away the dollars needed to cover these bills during the year.
Some lenders might even charge a fee to borrowers who want to pay their property taxes and insurance bills on their own. Others require that borrowers enter into escrow agreements if their loan-to-value ratios are 80 percent or higher. Some borrowers, though, forgo escrow and handle their property taxes and insurance bills on their own. What is the benefit to that? It mostly comes down to interest. In return, they agree to take the home off the market, make it available for inspections, and carry out any agreed-upon repairs or provide disclosures to help see the sale through.
When you finally get to closing day, the earnest money will be subtracted from the amount you owe the seller and put toward closing costs. And if the deal falls through? Okay, even after you purchase a house, most mortgage lenders will request you have an ongoing escrow account for taxes and insurance. This escrow account will be in your name, containing money paid in by you, and accessed by your mortgage lender. Taxes and insurance are the parts of your monthly payment that will go into your escrow account and be held by your lender to pay property taxes and home insurance each year.
The escrow account does that for you! Calculating escrow is as straightforward as taking the total amount of your property taxes and home insurance bills for one year and dividing that number by 12 monthly payments. Keep in mind, how much you pay will probably change every year depending on the rise and fall of your property value and the economy.
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The information on this site does not modify any insurance policy terms in any way. A mortgage escrow account is an integral part of the financial picture for most homebuyers. Some homebuyers are required by their mortgage lender to have an escrow account; others may opt-in to one through their mortgage servicer.
Having your mortgage lender or servicer hold your property tax and homeowners insurance payments in escrow ensures that those bills are paid on time, automatically. In turn, you avoid penalties such as late fees or potential liens against your home. Your homeowners insurance premiums and property tax assessments can fluctuate over time. For example, if your escrow account happens to be short due to your property tax bill increasing, your servicer will typically cover the difference temporarily.
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