First, let me answer the 2 basic questions about Mortgage Escrow.
What is an escrow?
An escrow is when you include your taxes and insurance with your monthly mortgage payment.
How does Escrow work?
1. Buyer, seller and the Escrow Agent sign the escrow agreement.
2. Buyer deposits money and/or documents in escrow.
3. The Escrow Agent manages the escrow account.
4. The Escrow Agent confirms to the seller that the escrow amount and/or documents have been received in the escrow account.
5. Seller performs the required services.
6. Buyer accepts delivery and proof of acceptance is sent to The Escrow Agent .
7. The Escrow Agent releases the money and/or documents in escrow.
Now here’s my situation. I’m in the process of finalizing my mortgage for buying my first home. (I have to make a decision by the end of this month). I got Good Faith Estimates from a number of lenders and all of them had $2000 – $2500 going towards the escrow account. so I assumed thats how it has to be. But then during a conversation with one mortgage broker, he asked me if I wanted to escrow my taxes and insurance. I then asked him if that will help me get a better rate or if there are any other advantages to an escrow account. He said that if I don’t escrow the lender sometimes charges a quarter point. But I have checked this and most big banks and lenders don’t really care either way. So I negotiated with the broker and he said that he is willing to “eat up” that quarter point.
So that got me thinking. Should you, or should you not, go for an escrow account?
The major advantage of a mortgage escrow is that the lender assumes responsibility for paying your property taxes and homeowners insurance. This is also the major disadvantage. In addition, with an escrow the lender gets to keep the interest on your account.
Many people don’t want to get a big tax bill all at once. They prefer to pay a little bit every month and don’t want the headache of paying it on time. Having said that, there have been cases where the lender failed to pay it on time causing an even bigger headache to the borrower.
So what will I do ? I’m going to pass on the escrow account. For control freaks like me, I like to be in charge of paying my dues on time and not lose any interest on my money. There are 2 big advantages I see by not escrowing. One I pay less at closing, and two, I pay less every month. Of course I’ll get a big tax bill, but I think I can handle that.