Dear Dr. Don,
Does it make more financial sense to roll your property taxes and house insurance into your mortgage, or to pay the bill separately?

Crystal Cache

Dear Crystal,
Lenders often require homeowners who don’t have much equity in their homes to escrow property taxes and insurance payments. That helps the lender manage risk in case you don’t pay these bills, which would leave them to face potential losses from property damage or tax liens. If you have enough equity in the home, the lender may allow you to waive escrow provisions.

In general, if you’re required to pay private mortgage insurance, or PMI, you’ll be required to escrow your taxes and insurance. For conventional first mortgages, that means that if the first mortgage has a loan-to-value of more than 80 percent, you’ll have an escrow account.

Jack Guttentag, the Mortgage Professor who writes for Yahoo Finance, stated the following in a recent column: “If you intend to put down less than 20 percent, it becomes more complicated. In most states, lenders are willing to waive escrows for a fee — usually one-fourth to three-eighths of a point. However, in Washington, D.C., Illinois, New York and Oregon, lenders are barred from charging a waiver fee, which means that they may be less willing to waive escrows in those states.”

When you don’t have an escrow account, you are responsible for making sure that the property is covered by homeowners insurance and that the taxes are paid. One benefit of being in control is that you don’t have to worry about whether the payment was made out of the escrow account. That’s especially true when your mortgage servicing is sold by one service company to another.

Another benefit is that you can invest the money between scheduled payments and earn a return on these funds. Escrow accounts often don’t pay interest. However, in some states it’s required that you earn interest on your escrow balances.

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