There are several reasons why you should escrow taxes and insurance and there are a few reasons why it might not be a good idea. In this article, we will discuss the reasons why it is a good idea to escrow your taxes and insurance. Escrowing makes a lot of sense for most people.
For those of you that do not know, to escrow your property taxes and insurance means that you will allow the servicer of your mortgage to collect your tax and insurance payments as installments that are included in your mortgage payment. This minimizes risk from the lender’s standpoint because they know that if the mortgage is being paid, the taxes and insurance on the property will also be paid. It is also easier for many homeowners to escrow their taxes and insurance so they don’t have to worry about coming up with a lump sum payment for those items when they become due.
Another reason why you should escrow has to do with rising property taxes (lately, property taxes have decline in most cases – take that as good or bad). If your property taxes rise $500 in one year, your escrow account will likely be short when taxes become due. If you are not escrowing, you will need to come up with this increase in taxes in one lump sum. If you are escrowing, the lender will often allow you to come up with the increase over a twelve month period by simply increasing your mortgage payment over a twelve month period.
Finally, escrowing is required on FHA loan programs and often the best choice on a conventional loan. It’s common that lenders will charge a higher interest rate if you do not escrow. They will either increase the rate or charge a fee of one eighth to one quarter of a percentage point based on your loan amount. The savings you will realize by escrowing might be nominal at first, but they do add up over the long term.
These are the top reasons to escrow. Of course, there are reasons why you shouldn’t, but those reasons will be addressed in a future article.
