Escrow Accounts Explained
For Phoenix Homebuyers

If you’re a new homeowner, or soon to be one, chances are you may have what’s called an escrow account as a requirement of the loan. Escrow accounts are also called impound accounts or reserve accounts. Escrow accounts are accounts set up through the lender on certain loans where you pay the lender your monthly mortgage payment along with your monthly property taxes, homeowner’s insurance, PMI, and any other related expenses such as homeowner’s association fees.

For example, let’s say the principle and interest is $1000 a month, property taxes are $2400 per year, homeowner’s insurance is $1200 per year, PMI is $50 per month, and homeowner’s association fees are $100 per month. If you have an escrow account, instead of paying $1000 per month to the lender, and separate monthly or yearly checks to the other parties, you will pay $1450 per month to the lender. All of a sudden your $1000 house payment is $450 higher. Of course, you have to pay the $450 one way or the other.

The lender may require an escrow account if you have a small down payment such as just ten percent down or less. This helps to protect the lender by making sure that all fees and taxes related to the loan are paid promptly. For the homeowner, escrow accounts can be seen as either a convenience or an inconvenience.

Paying one monthly check is convenient and you don’t have to worry about budgeting for an annual tax bill or homeowner’s insurance bills when you have an escrow account. Because you have to pay one way or another, many people like the convenience of paying one monthly sum.

However, escrow accounts have their downside as well. In most cases, escrow accounts must be pre-funded. This means that a good deal of your cash is placed into the escrow account as a “reserve”. You will pay monthly payments on top of this. So if you end up putting a year’s worth of property tax money into an escrow account and you are still paying the monthly amount, you essentially have lost use of your money. The lender will hold this money even though you are paying monthly. You’ll get it back when you refinance or pay off the loan but that could be years away.

Another drawback of escrow accounts is that you are at the mercy of an institution to pay your bills. If they miss a payment, you are still the responsible party. Generally the lender will take responsibility for late or missing payments if they are due to their internal errors but it still can become a hassle.

Having your hard earned money sitting in an escrow account means you are possibly losing out on interest too. Lenders do pay interest on the money however their rates tend to be much lower than what you can get elsewhere.

Depending on how you prefer managing your money will make a big difference in how you like having an escrow account. If you have trouble saving and budgeting for big annual bills, an escrow account acts like a forced savings plan and may be a great tool for making sure you have enough money to pay your taxes.

If you prefer to manage your own money and do your own investing and budgeting, you will most likely hate the escrow account. To remove the escrow account requirement, you will need to get your home equity up to twenty percent or better and have an excellent payment record. If you can achieve this, also ask to have any PMI (Private Mortgage Insurance) requirements removed at the same time.

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