Although most folks choose to escrow their real estate taxes and homeowner’s insurance monthly, I am often asked whether or not this is wise. As long as you have a minimum of 20% equity in your property, you actually have the choice of “waiving escrows” or paying the taxes and insurance on your own when the bills become due each year. The only caveat being that most lenders charge an “escrow waiver fee”, which is commonly .25% or a quarter of one percent of the loan amount. This is a one-time fee due at closing, not something added to the rate.
Upon first glance, one would think that the answer lies in whether you could get a better rate of return on the money that you’d be putting into escrow each month if you kept it and invested it versus the waiver fee. But there are several factors that come into play when considering which way to go. For starters, it is convenient for most folks because it is budgeted for and handled by the lender at no extra cost. This way you’re not hit with a lump sum bill that you hadn’t budgeted for. If you do have a tight budget or you’re not real disciplined, this is probably the way you should go.
On the flip side, most lenders require three months of reserves to start out an escrow account. This is a cushion should the taxes or insurance premium go up (as they generally do) the following year. And if there aren’t enough funds, they hit you up with a shortage which is due either as a lump sum or they will conveniently add it to your monthly payment, which can crimp your budget.
The biggest problem is that escrow accounts can be difficult for the average person to reconcile, although the lender sends an “Escrow Analysis Statement” at the end of the year. But too many people rely on the lender to be correct, and millions of dollars go unaccounted for each year by way of escrow accounts. My advice is to pony up the fee and waive the escrow account. However, if you’re more comfortable carrying an escrow account, be sure that you can account for every penny flowing in and out of the escrow account. If you don’t understand the analysis statement, be sure to contact the lender and go over it in detail until you do.
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Gregg Harris has written 16 articles on LenderCity
