Dear Dr. Don,
Having no escrow requires discipline
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?
-- Marva Mortgage
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.
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
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
your escrow grow for you, not your lender," has more
about this decision.
-- Posted: July 26, 2004