Two of your obligations as a home owner are to pay the property taxes on your home and to make sure that the insurance is up to date. Failing to be responsible by not paying your taxes and homeowner insurance on time will have a negative effect on your lender, as they can lose the money that was lent to you if something happens to the property. When you acquire a mortgage loan, you have the option of using escrow, but sometimes this can be mandatory.
What is a Mortgage Escrow?
When taking out a mortgage loan, you have the option of signing up for an escrow account. This account will hold money for some of your bills, like property taxes or homeowner’s insurance. The amount that will be needed to pay these bills will be added to your monthly mortgage payment. Then the money is used by your lender to pay your property taxes and insurance. It is the borrower’s duty to deposit money in the escrow account monthly, with the mortgage payment and, when the time comes to pay your taxes and insurance, the lender will see to it that these payments are made on your behalf.
The escrow service can be optional, but many lenders will require you to pay these home bills through escrow, in order to protect themselves. Having your home insured against hazard and seizure for back taxes, gives peace of mind to lenders, so they can use your home as collateral for the loan.
Usually, your monthly mortgage payment will include the payment for the insurance and property taxes. When closing on the loan, if there are only a few months left until the property taxes are due, you may be required to make a bigger deposit so the taxes can be paid in full. Also, if the taxes and insurance go up, you will be required to make a larger escrow payment, which will of course affect your monthly mortgage payment.
Benefits of Mortgage Escrows
Mortgage escrows do not only benefit lenders. They can also benefit you, the borrower, mostly by making your life easier. While the lender uses mortgage escrow as sort of an insurance in case you default on your loan, such an account will mostly help you by making the paying of your property taxes and insurance more convenient. Here are two important advantages of using mortgage escrow:
- Convenience. Keeping track of all your home related payments, such as utility bills, taxes, and insurance can be a real hassle, especially if you are not organized, or don’t have the time to deal with this aspect of being a home owner. City, town or county tax payments will probably have to be sent to different places and at different times, increasing the risk of just forgetting to send a payment. Because the escrow includes all your tax and insurance payments into your monthly mortgage payments, you won’t have to deal and keep track of each individual bill. Managing your budget is also a lot easier because you will make smaller payments every month and won’t have to come up with a large amount of money when the taxes or insurance are due.
- No late fees. Because your lender has the responsibility of paying your property taxes and insurance, you won’t have to pay the late fees if a payment isn’t made on time. The lender will have to cover all of the penalties, as long as you are on time with your monthly mortgage payments. Lenders use sophisticated systems and software to keep track of payments, so it is very unlikely that they will miss or make a late payment. Being late on your insurance payment can have graver consequence than just paying a late fee. The insurer can actually cancel your coverage, so using a mortgage escrow is very advantageous if you are not well organized.
Disadvantages of Mortgage Escrows
Like most services, mortgage escrows come with a couple of disadvantages. While having most of your mortgage related bills bundled into one monthly payment is a great thing that makes your life easier, it can also mean trouble for people whose income fluctuates from month to month. Because you are required to make an equal payment into your escrow account each month, using this service will create difficulties in managing your budget if you are counting on a quarterly or annual bonus, for example, to make your tax and insurance payment.
Another disadvantage is that the money accumulating in your escrow account doesn’t generate any interest like it would if you kept it in a personal savings account. Not using mortgage escrow means that you always have access to your money and can invest it into something that will earn you a higher return.
When buying a home, you should first find out if the lender requires you to use mortgage escrow. Secondly, before deciding if this is the best choice for you, you should carefully weigh in on both the advantages and disadvantages of this type of account. While mortgage escrows can make it more convenient for you to deal with some of your home bills, they also require you to pay a monthly amount that won’t generate any interest over time. Mortgage escrows are a great choice for someone who doesn’t have the time to keep track of all their property bills and doesn’t want to deal with having to make a lot of payments throughout the year.