Is Mortgage Escrow Really Worth It?
signing escrow form getty  When I refinanced my home several months ago, one move saved me thousands of dollars at closing and continues to save me money. That move was making sure I had enough equity in my refinance to forgo my need for an escrow account. People typically assume they need an escrow account, but it may not make sense for you. An escrow account, in the case of a mortgage, functions as a middleman between a homeowner and tax entities, insurance companies, or anyone else whom the homeowner designates to pay with the funds saved in it. It is typically a mandatory savings account attached to the larger mortgage payment. Mortgage escrow services are popular with mortgage lenders because they prevent foreclosures due to the lack of payment of property taxes. Here are some downsides to having an escrow:   When purchasing a home, the up-front funding for the escrow account can add several thousands to the closing costs which, if financed within the loan, can cost you for years to come.  The escrow generally must maintain a minimum balance, and if taxes and fees come in higher than estimated, your escrow payment may grow to replace that minimum balance, which means your mortgage payment will fluctuate.  Most escrow accounts do not earn the account holder any interest. If you have a substantial amount to pay in property taxes, imagine an account holding thousands of dollars and earning no interest. Escrow accounts can create the credit card effect. When I completed my refinance, I set up my homes property and casualty insurance on auto-payment. I also started a monthly deposit to a savings account to cover property taxes. Coming face-to-face with these actual costs had me taking the extra step of shopping for less expensive insurance coverage and appealing my tax assessment. Both efforts yielded us substantial savings. For me, the escrow account acted as a buffer to my being totally aware of the overall cost of housing. Just like using a credit card can encourage over-spending, using the escrow account made me much less aware of exactly how much I was paying for insurance and taxes. The escrow was not at fault for me paying more than I needed to. That was my responsibility, but not having the escrow brought me face to face with the reality of what I was spending on insurance and taxes. Escrows are not all bad. There are good reasons to maintain an escrow:   If youre not great at saving for big expenses, it can save you from yourself. Rather than making individual arrangements to separately save for property taxes and insurance, these expenses are included in one payment.  You may get a slight reduction in your mortgage rate for maintaining an escrow account. The lender benefits by having an escrow in place for taxes and insurance because it protects them against the risk of the collateral for their loan (your home) being auctioned off by the county if those expenses are not paid. (Its also worth mentioning that they probably make some money in interest from the money that accumulates in your account as well.)  It reduces the uncertainty of the property not being insured against catastrophe if you miss a payment. It depends on your situation. If you are not refinancing your home, once you pay your home down below 80% loan-to-value, you may be able to request removal of the escrow account, but some lenders may charge a fee to do so. Keep in mind that the escrow is not in place to protect the lender only. If you choose not to escrow, you will need to be very confident in your ability to save for the property taxes separately. You may also want to consider having the insurance premiums auto-debited so you dont forget. You may be able to save money on insurance by paying it as a lump sum, so saving for the annual payment and then paying it can offer some savings as well. If you are in a situation where you have more than 20% equity in your home and you are confident you can maintain the discipline of paying your insurance and your taxes, then leaving the escrow behind can save you a lot in the long-run.