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Should you escrow or not?
When purchasing or refinancing your home, you will have the ability to choose whether or not you want to add escrow (taxes and insurance) to your mortgage payment. Some advantages to escrowing are that you will not have to worry about having to pay these items separately. However, if something were to happen to your financial situation, you would still be responsible for the full payment which includes both taxes and insurance, which at that time may be difficult to continue to do. Another alternative is to put that money for escrow away yourself in some kind of interest bearing account. This way, your money is working for you as you gain some interest and if there is a hardship, you won't be obligated to a higher payment a month. Either way, depending on your situation, you the consumer do have a choice in what you should do.
Some programs that you qualify for, may require you to escrow. The same is true with lenders, some may require you to escrow and others might not allow you to escrow. Once you have decided if you would like to escrow, you should let your mortgage professional know, so that they can find a program and a lender that will meet your needs.
The main reason that lenders like to see an escrow account for taxes and insurance payment is because when tax bills become late the state and county in which the taxes are collected can then be placed in the number one lien position, in front of your lender.
One thing to be aware of is that, frequently, loans for which you do not escrow taxes and/or insurance will have a slightly higher interest rate. Always ask your mortgage professional for the rate with and without escrow and then decide which would be the better approach for you.
Many lenders will charge you a fee of .25% when you choose not to escrow your property taxes and insurance. When escrowing these, you need to establish escrow accounts which depending on when your taxes and insurance are due can be quite a lot of money to either come up with or include in your new loan. Many people who do not escrow will use their income tax money to pay for their property taxes and insurance payments for the year. Also, if you choose not to escrow, you can check with your county auditor to see if they have any programs available that they will allow you to make monthly payments to them on your property taxes.
Another factor that is important to look at when deciding to escrow is the total of your taxes and insurance for the year. Some areas the taxes are very low, $1000 or less. This might not be such a burden to budget for on your own so you have the money when it is due. Other areas the taxes could be $8000 or more for the same type of home. In this case, it may be easier to escrow because you will not have to plan for such a large sum of money to be due.
If you decide to escrow your taxes and insurance you should expect your closing costs to increase. Lenders will collect a portion of the taxes and insurance ahead of time, as well as some reserves as a buffer. For example if taxes are due in September, and your closing is in March the lender will collect 7 or 8 months of taxes in advance. That way when you make your escrow payments through September when the taxes are due they have the full amount already available.
When refinancing your mortgage, escrowing your taxes and insurance will add up more to your principal balance. Some self employed people might not want to escrow because they want to be in charge of their cash flow. Instead of making monthly payment, they might save that tax money and invest somewhere else where the return of money is larger. Then when the tax time comes, they could simply take that money back and pay off the property tax.
» DISCLAIMER: The information contained in this article on 'Should you escrow or not?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.
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Article Contributors:First Time Homebuyer