Should You Combine Your Escrow and Your Mortgage?

When you take out a mortgage to buy a home, you're not just paying back the loan itself. Part of your monthly payment usually covers your principal and interest, while another part may be diverted into an escrow account. This escrow is essentially a holding tank for funds that will cover recurring expenses associated with homeownership, such as property taxes and homeowners’ insurance. While the more “common” option when it comes to an escrow account is to combine it with your mortgage, some buyers may prefer to keep their mortgage and escrow payments separate. 

What Does it Mean to Separate Escrow and Mortgage?

Should You Combine Your Escrow and Your Mortgage? Understanding Escrow

In the context of a mortgage, an escrow account is set up by your lender to collect funds that will be used to pay property taxes, homeowner's insurance, and possibly other items such as flood insurance and mortgage insurance. The idea is to spread these large expenses throughout the year, rather than hitting you with larger bills a few times a year. For example, if your property taxes and other miscellaneous fees total to $7,500 a year, you would receive two bills, each for $3,750 to cover the annual cost, whereas if you included escrow with your mortgage, you would instead spread the $7,500 over a 12 month period, adding $625 to your monthly payment. 

Benefits of Including Escrow in Your Mortgage

  • Simplicity: Combining your mortgage and escrow payments into one monthly bill simplifies your financial management. This means fewer payments to keep track of, which can be a significant convenience.
  • Budgeting: Escrow accounts help with budgeting by dividing your tax and insurance costs into manageable, predictable monthly installments. This can prevent the shock of large, unexpected expenses cropping up, which can be particularly useful for first-time homeowners or those on a tight budget.
  • Assurance: With escrow, you don’t have to worry about saving up for and making these large payments yourself. Lenders will ensure that property taxes and insurance premiums are paid on time, which safeguards you from potential penalties or lapses in coverage.

Downsides of Escrow Accounts

While escrow accounts offer convenience and simplicity, they are not without their downsides:

  • Less Control: When your funds are in escrow, you don’t control when to pay your taxes or insurance, or shop for potentially cheaper options. Your lender handles all payments, which can feel restrictive for those who prefer direct management of their finances.
  • Cash Flow: Your monthly mortgage payment will be higher with an escrow account because it includes these extra expenses. For those who are adept at managing their cash flow and prefer lower monthly payments, this can feel like a disadvantage.

Opting Out of Escrow

Choosing to pay your property taxes and insurance separately can indeed lower your monthly mortgage payment and may be appealing for several reasons:

  • Payment Flexibility: Paying these expenses on your own terms allows you to potentially earn interest on your funds until the bills are due. This flexibility can be advantageous if you have irregular income streams or are adept at managing larger sums.
  • Potential Savings: If you opt out of an escrow account, you might find opportunities to shop around for cheaper insurance, thereby saving money that otherwise would have been allocated months in advance.
  • Direct Control: Managing these payments yourself puts you in the driver’s seat, giving you direct oversight over when and how your taxes and insurance are paid.

Things to Consider

If you’re considering managing your escrow independently, think about the following:

  • Discipline: Are you disciplined enough to set aside money each month for taxes and insurance? Failure to do so could lead to financial strain when these large bills are due.
  • Loan Type: If you have an adjustable-rate mortgage, your interest rates—and thereby your monthly payments—can fluctuate. In such cases, having an escrow account can provide a layer of predictability and security.
  • Lender Requirements: Some lenders require escrow for certain types of loans or for borrowers who make a down payment less than a certain threshold. 

Deciding whether to pay your escrow separately from your mortgage ultimately boils down to your personal financial discipline, cash flow management, and preference for control over your financial obligations. As with any financial decision, carefully weigh your options and consider what fits best with your overall financial strategy. Keep in mind, whether you choose to include escrow or pay it separately, you’ll still have to pay the account balance. Ready to dive into the possibility of homeownership? Contact us today! 

Post a Comment