Introduction to Mortgage Escrow Accounts
This is really a personal preference. First let me give you my definition of an escrow. An escrow is simply a holding account held by two parties that a person puts money into which is paid out upon completion of a transaction. In terms of your first house, an escrow account will be used to pay property tax and home owner’s insurance. Depending on what type of mortgage you get, you may be required to use an escrow account to pay property tax on your house. Escrow accounts reduce risk and, in some cases, can add convenience.
There’s not much risk reduction for you, this is mainly for the lender to assure you pay your property tax to prevent their asset (your first house) from getting sold at auction. If you would have trouble saving up to pay your property tax at the end of the year, you can look at this as a reduction in your risk — of being shocked with a bill for property tax and no money to pay it!!
For you, this is where you win and the mortgage companies lose! You do not have to worry about being shocked with a bill and only pay one bill to the lender. Your “house payment” includes the payment on the loan along with that month’s portion of property tax and home owners insurance. Three bills became one!
The Downside to Escrow:
We have all heard the friend or neighbor say: “Well, I just can’t get that car yet because our house payment just went up, we didn’t see it coming!” Yes, this can happen at the whim of the escrow company. Well, to be honest its not really at their whim. Its obviously caused by an increase in your property tax (via a periodic appraisal) or your homeowner’s insurance. Of course, this assumes you have a fixed rate mortgage.
If escrow is not required by your lender, you may decide it will be better for you not to have one. It is good for you to be in touch with what your property tax and insurance premiums are. Plus, when a non-escrower looks down and sees the property value has been increased by twenty percent by the county, he is more apt to challenge the new value.