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  Ask Dr. Don By Don Taylor, Ph.D., CFA, Bankrate.com    

Having no escrow requires discipline

Dear Dr. Don,
I'm about to purchase a home. But I'd rather pay my property taxes in one lump sum at the end of the year. (I had no choice with my first home because it was required in the monthly payments.) Which is better ... that way or spread out in my mortgage?
Thanks,
-- Marva Mortgage

Dear Marva,
Known as reserve, impound or escrow accounts, depending on what region of the country you live in, the homeowner makes monthly payments to the account in order to accumulate enough funds over the course of the year for the lender to pay the property taxes and homeowner's insurance from the account. The escrow account has the advantage of forced savings for the homeowner. There's no scrambling for funds when the taxes come due or when you get the insurance bill.

The advantage of not escrowing your property taxes and insurance is that you have use of this money through the year rather than ceding that use to the mortgage-service firm. You state that not escrowing the funds is your preference.

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Lenders typically require escrow accounts on loans with high loan-to-values as another way of managing risk. Most lenders require escrow accounts on residential homes with LTVs over 80 percent. The laws of your state can determine whether an escrow account is required and whether interest is paid on the monies held in that account.

Waiving escrow can increase the cost of your mortgage. Lenders often charge a fee to waive escrow. The charge can be a flat fee or a percentage of the loan amount. Before deciding to waive escrow, talk to your lender about the costs associated with that decision.

If you have the discipline and financial wherewithal to have the money available when you need it, then it's a straightforward decision between what it will cost you to not have an escrow account and what you can earn on these funds by investing them over the course of a year. The Bankrate feature, "Let your escrow grow for you, not your lender," has more about this decision.

-- Posted: July 26, 2004

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See Also
Unpredictable escrow makes payments variable
Let your escrow grow for you, not your lender
Financial advice glossary
More Dr. Don stories

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