Mortgage Escrow Accounts

• Mortgage companies generally require an escrow account to collect your tax and insurance payments if your new loan is more than 80 percent of your home's value. The premium for your insurance plus your property tax estimate is divided by 12, then added to your principal and interest payments. Some borrowers who are not required to carry an escrow account on their mortgage choose to have one anyway, to save for these bills. However, you might avoid having one on your loan by asking the lender to waive the requirement for a new loan or cancel it for an existing mortgage.
  
  

Interest Losses

• When your mortgage company keeps a portion of your monthly payment in an account, you lose the ability to use the money or collect interest on investing it. Lenders in some states are required to pay borrowers a small amount of interest on the amount held, but it may be minimal in comparison to gains that you can achieve on your own. If you're disciplined enough to place the escrow money aside to use when needed, you may be better off financially than allowing the lender to hold onto your cash.
  
  

Changes

• At the end of the year, your mortgage company will evaluate the payments made from your escrow account and determine if they'll be accurate the following year. If your taxes or insurance premium increases, you can owe more every month when you make your payment. This will result in an unexpected outflow of cash for which you haven't budgeted. Sometimes you can have an excess amount in your escrow account that's refunded to you or kept for the next year. However, you could have used the cash for something else. When it's stuck in your escrow account, it restricts the choices of how to spend your money.
  
  

Lender Error

• Lenders who manage your escrow accounts can make mistakes. Your mortgage company may have many escrow accounts to balance, or your loan may be sold to another lender. As a result, sometimes your property taxes and homeowner's insurance premiums are not paid on time, or at all, especially if you recently purchased a home and the tax statement is sent directly to you. If you receive a bill that your lender is responsible for paying, call customer service and fax the bill to the company. Follow up to ensure that it was paid. Unfortunately, you may not know when your mortgage company misses a payment through your escrow account until a late notice is sent and penalties have been added to your bill.