Escrow Accounts: Should You Have One Or Not?

It was only a few weeks ago when I was reading some mail while I had my mom over for lunch during the week of her spring break from teaching. My big girls were at school (different county than my mom’s school) and my twins were napping. I commented that I must have missed the insurance paperwork for the house come through at some point because my mortgage company sent a letter informing me that they’d mailed out my homeowner’s insurance payment and it was less than I thought. My mom asked me if we have our insurance and taxes taken from our escrow account.

Then she told me she and my dad don’t do that. They pay theirs out of pocket throughout the year when the bills are due. We’ve always just had ours added into our mortgage and paid through escrow. Quite honestly, I’ve always found it a bit less stressful to have two less bills to worry about throughout the year – and budgeting for them. The fewer the better in my opinion. She begged to differ and a friendly debate ensued. I said that I prefer to pay the mortgage company a bit more every month to let them handle that than to be bothered with it myself. I mean, I have four kids; do I look like I want to take the time to write and mail two more checks every year? I don’t.

It did, however, get me thinking about mortgages and escrow. Do you use escrow, or do you pay your taxes and insurance out of pocket? It turns out that there are some pros and cons to each, and we thought we might go over them now.  

Pros of Escrow Accounts

• The biggest pro associated with escrow, in my opinion, is the lack of care I have about things like taxes and insurance. Someone else handles it for me, it’s two fewer things I have to do, and it really feels as if it simply is not my problem when I use escrow.
• There is no sticker shock with an escrow account. I don’t know about you, but I know what to expect in terms of bills that show up in my mailbox throughout the year. I think I would have been pretty unhappy that first year of homeownership more than a decade ago when our insurance bill arrived and I had to write a check for it. When it is already taken out of your monthly payment, it seems so much less expensive.
• Potential refund checks are always fun to receive. In more than 11 years of homeownership in two homes, this has happened twice. Our rates just don’t fluctuate enough to make a huge difference, so there is that. The year we built our first house, though, our monthly payment was much higher than it needed to be and we overpaid our escrow significantly as a result. We were shocked to check the mail and find a check for $750 two weeks before Christmas that year. Talk about a pleasant surprise!

The Cons of Escrow Accounts

• Higher monthly payments are no one’s favorite, but your bill is getting paid so that seems to work out for me. When you wrap up your escrow into your mortgage, you might pay significantly more than you would otherwise. Now, to counteract that one, you might also think of it as savings since you would have to save the money anyway to make those payments.
• Changes in monthly payments occur on occasion when you escrow. Let’s say that your taxes go down or your insurance goes down at some point. When your escrow analysis is performed at the beginning or end of the year (or whenever), the mortgage company might find that you have overpaid or underpaid; but both will change the amount you pay next year. We switched to a new insurance company with a much better plan this year on one of our homes, and it cut the bill in half. We now pay $60 per month less for our escrow payment than we did last year. That was nice. Of course, one year our mortgage payment increased by more than $20 because our taxes went up. It’s a chance you have to take.

Whether or not you choose to escrow your payment each month is up to you. You can do it, but you do need to check with your mortgage company to see if you even have an option. If you did not, for example, put 20% down on your home then you will need to pay escrow as it is not an option. I highly recommend it, as it is far less stressful to pay a little each month than it is to pay a lot each year, but that is just me.

Photo by Getty Images