Should You Escrow Your Property Taxes and Insurance?

Key takeaways: 

• Most homeowners with mortgages have an escrow account that pays for homeowners’ insurance and property tax. 
• There are pros and cons to continuing to use that account, versus making those payments on your own. 

If you have a mortgage, you’re probably familiar with the escrow account that stashed your earnest money until you closed on your home purchase.  

But what you may not know is that for most homeowners with mortgages, that escrow account stays active until the loan is paid off. The company that services your mortgage uses the money in the account to pay other expenses you are responsible for, such as your property tax and homeowners’ insurance.  

Many people appreciate that convenience, but some people may not. There are advantages and disadvantages to both approaches, which we’ll cover in this article. 

Advantages to using a mortgage escrow account 

• Escrow may be required. It’s important to note that some lenders require borrowers to escrow money for things like taxes and insurance. That’s their way of making sure those important expenses get paid correctly and on time. In some cases, escrow accounts (sometimes also called impound accounts) are required by law, and some types of mortgages, such as FHA loans, always require them.  

Some lenders may also offer some incentives to borrowers for using an escrow account. Those may include money to be used for closing costs, or a slight discount in the mortgage interest rate.  

• Easier budgeting for big expenses. By far the best reason to voluntarily use an escrow account is that the amounts you owe for large, required expenses get added to your monthly mortgage payment. That means you’re paying smaller amounts on a regular basis, even though expenses like property taxes are generally only due twice a year. Many people find the escrow process an easier way to budget for big expenses. 

• Smooths out increases. Having an escrow account can also make adjusting for any increases in the amounts you owe for taxes and insurance just a little easier: your servicer will generally cover the amount on your behalf, and then adjust your monthly payments upwards to account for it.   

• Convenience. If your lender makes the payments for you, it’s also one less thing you have to remember and take care of. Lenders and servicers are required to send you an annual accounting of activity in the escrow account – both the amounts added to it via your monthly mortgage payments, and the amounts they pay out on your behalf – so you should be aware of everything that goes on. 

Keep in mind that if you have a home equity agreement with Unlock, you are required to have homeowners’ insurance. You also must stay current on your property tax obligations. While Unlock doesn’t mandate that you use an escrow account, doing so may make it easier for you to meet those requirements. 

Disadvantages to using a mortgage escrow account 

• Turning over more money up front. The biggest downside to paying insurance and taxes out of an escrow account is that you hand over more money every month than is technically required. Yes, you are required to have insurance and to pay taxes, but some people would simply prefer to keep the money in their own bank account until it absolutely must go out the door and be paid. 

• Trust factor. For important expenses like tax payments and insurance premiums, many people simply feel more comfortable handling it themselves rather than relying on a third party. If that’s you, just make sure you know well in advance how much you owe, and where and how you are supposed to remit the funds.  

While most mortgage payments are processed correctly and on time, there is some precedent for homeowners to be wary of mortgage servicers. In the aftermath of the subprime crisis, some servicers took advantage of borrowers, while others were simply unable to keep up with the volume of processing they were supposed to do, leaving homeowners with incorrect records and penalties.  

How to avoid using an escrow account 

If you choose to make your own tax and insurance payments, you may want to set up a separate account of your own, similar to the concept of an escrow account. You may consider diverting a small portion of each paycheck to it, so you are prepared to pay the large bills when they come due. This kind of account is a good candidate for a high-yield savings account — not for playing the stock market! 

However you pay these bills, don’t forget that there may be ways you can reduce your property tax bill, and make sure you’re understanding all the ins and outs of homeowners’ insurance.  

Conclusion 

There are solid reasons both for opting to use an escrow account and for opting out. Understanding more about the practice and the history may help you make a more informed decision. Just remember that if you do decide to make the payments yourself rather than relying on a lender or servicer, you must be on time and accurate.