YOU ASK:

Is it good to escrow tax and insurance in your mortgage payment?

WE ANSWER:

Yes, putting your tax and homeowners insurance payments on your mortgage on escrow will help make sure that you stay up-to-date on these regular payments. And it gives you the added convenience since you don't have to be reminded to pay this on a monthly basis.

As a background, an escrow account is an amount of money you collect in anticipation of future monthly payments. The escrow is often required if you want to get a mortgage. The monthly mortgage amortizations may also stay constant, decrease or increase, based on the activity of the escrow amount during the year.

This means that you won't be pressured to come up with the lump sum amount for these two at the time when they are about to be paid. This happens when property taxes increase or when there is an insurance claim.

Even with the escrow, you may find your fund short because of the higher taxes or higher insurance premiums. In this case, what the bank will do (if you are escrowing), will allow you to pay the property tax increases over twelve months. This is in contrast in a situation when you don't escrow - the increases in the taxes will be charged as a lump sum that covers the entire year. So you can just imagine the pressure of coming up with a large sum of money to meet these property taxes.

This is also good for your lender, as they are sure that even as you pay for the mortgage amortization, you also pay for the taxes and insurance on the property. That is why, often, banks and other lending institutions will charge you higher interest rates if you do not have an escrow account. This may be up to one-eighth to one-fourth of a percentage point (based on the amount of your loan). This may seem small at first, but when you compute this amount for the long term, it can mean substantial savings for you.

Every year, an analysis will be done to know the level of activity on the escrow. This will take into consideration what was paid for taxes and insurance during the previous year. It will then compute the new escrow needed in response to changes in taxes and premiums. This will also look into increases or decreases in property values and taxes.

In sum, an escrow is a good idea because it:

  • Gives you peace of mind
  • Helps you manage your budget
  • Ensure that your home is always insured and your investment is protected
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