Pros and Cons of Mortgage Escrow Accounts

Mortgage escrow accounts don’t often come up in conversation, so it’s understandable why many don’t know much about them. The short answer is that they are reserve accounts that the mortgage servicing company holds for the homeowner that contain money to pay the property tax and homeowner’s insurance bills when due. Though they technically own the money in this escrow account, homeowners can’t touch any of it until they pay off the mortgage.

The thinking behind this arrangement is that this money helps the borrower budget for these expenses while also helping protect the lender’s investment. Given that many people are required to open one when they borrow money to buy a home, escrow accounts function kind of like an involuntary savings account. This arrangement has advantages and disadvantages that have different implications for different people. Looking into some of the pros and cons of an escrow account can help you decide if one is right for you.

PROS

• Since lenders are in control of your money, they’re the ones responsible for paying your property tax and homeowners insurance bills. You don’t have to worry about missing any payments or saving enough money to cover a huge bill on tax day each year. This budgeting relief is especially helpful considering that these costs can fluctuate.
• If the borrower agrees to have an escrow account, many lenders will provide discounts on things like interest rates and closing costs.

CONS

• The thousands of dollars of your money that is tied up in an escrow accounts any given time has a potentially large opportunity cost as you could have been earning interest on that money if you were able to invest it elsewhere.
• Sometimes the borrower is required to deposit a large sum when the escrow account is initially opened that’s equivalent to a few months’ worth of property tax as a buffer. Additionally, if rates fluctuate enough that extra money is needed to cover an escrow shortfall, you will be on the hook for replacing the buffer.

If you’re like most people who don’t have the option to opt out of an escrow account, these pros and cons are irrelevant. However, if you do have that option – and you can minimize the escrow waiver fee – you should investigate further to figure out which decision is right for you.

If you’re good at saving as well as investing money, then you wouldn’t have any issue holding on to enough money to pay these large annual bills when they come due. By forgoing an escrow account you have the opportunity to put that money in a savings or investment account that earns interest for you over the course of the year. Additionally, if your income is based heavily on bonuses or commission instead of a consistent salary then that extra money can help with monthly cash flow and help you save more effectively.

That said, nothing is guaranteed and handling that money would mean more work and responsibility on your end. So while escrow accounts do mean you miss out on potential opportunities to invest or grow your savings account, they also help limit your chances of making money mistakes and give you one less thing to worry about. That’s why it’s best to analyze your situation and fully explore your options before taking action.