4 Advantages of Mortgage Escrow Accounts
June 27, 2022If you're getting a mortgage on your home, your lender will most likely require an escrow account to be set in place. It's common practice when you have less than 10% equity in your home, or if you're buying the property with some types of loans, such as a USDA loan or FHA loan.
So you're probably wondering what mortgage escrow is and how it affects you.
In general, an escrow is a financial instrument, commonly an account, where a neutral third party holds or manages funds on behalf of the parties involved for specific purposes until a transaction is done or a contract is fulfilled.
When it comes to real estate, escrow accounts are mainly used to hold money paid upfront to demonstrate the buyer's intent on purchasing the property or to ensure the payment of home expenses, such as taxes and insurance, among others. The latter is what's known as mortgage escrow.
With mortgage escrow, the annual cost of your property taxes, homeowners insurance premiums, and other expenses are calculated and divided equally between the 12 months of the year. This amount is then collected as part of your monthly mortgage payment and goes straight into your escrow account, so when the bills come due, the funds are available to cover them on your behalf. By doing so, your lender ensures all bills are paid on time and no penalties, late fees, or liens are applied against your property.
But how does this benefit you?
1. ConvenienceAn escrow account can give you as a homeowner the convenience of only having to make a single, manageable payment every month, included in your mortgage bill, to cover all of your home-related expenses.
Managing these bills on your own requires writing multiple checks on separate dates to the mortgage company, tax assessor, insurance company, and even other taxes, insurance, and even HOA payments that can be managed by escrow.
2. PredictabilityThere are hardly any surprises with a mortgage escrow account. You can expect to pay the same amount for escrow every month, included in your mortgage bill.
If the escrow portion of your monthly mortgage payment ever needs to be increased, you will be notified in advance by your lender or servicer. Typically, servicers will send you an annual statement detailing your escrow payment, including overages and shortages.
3. SavingsThis will likely be the sweetest perk of having an escrow account for many homeowners.
Some states offer a discount if property taxes are paid early. In Florida, paying in November will result in a 4% discount as property taxes aren't due until March. Having a mortgage escrow allows lenders or servicers to pay less on your taxes, as according to James Sahnger, loan officer with Florida-based C2 Financial Corporation, a lender will always pay taxes at the earliest date to get the discount.
Also, less risk for the lender can lead to lower mortgage rates for you. So depending on your loan and/or mortgage lender, opting for an escrow account may result in discounted mortgage rates.
4. Lower RisksWith a mortgage escrow, your lender won't be the only one with lower risks, as you will be able to keep your home expenses in line with a single, manageable monthly payment included in your mortgage bill. This drastically lowers the chance that you could ever default on property taxes, lose your homeowner's insurance coverage due to lack of payment or incur in any type of penalty, fine or lien that could jeopardize your property o finances.
In fact, experts agree that even when not required, opting for a mortgage escrow account is the smart choice. There's no specific advantage to removing escrow unless you feel the interest you could earn on the money that would be held in the escrow account will outweigh paying escrow on a monthly basis. Danielle O'Brien, owner and real estate broker with Massachusetts-based Parkway Real Estate, told NextAdvisor "not having a mortgage escrow could put you in a high-risk situation."
If you found this article useful and consider a mortgage escrow might be right for you, be sure to give us a call at (305) 235-4571 or toll-free at (800) 547-0006. You can also fill out the Contact us form on this page and we will get back to you as soon as we can. We will be more than happy to put our experience at your disposal.