If you have more than 20% equity in your home, you may be able to avoid the escrow requirement entirely. Some lenders may let you pay your own insurance and property taxes, believing that with significant equity in the property, it is in your interest to make payments on time. Even if you earn interest income on an escrow account, the rate is usually quite low. So you may prefer to control your own tax and insurance payments and take advantage of the opportunity to earn more interest in a regular savings or money market account.
When your real estate taxes and home insurance
payments are due, your lender pays them from money you’ve
put in a reserve savings account, called an
escrow account.
Mortgage lenders require escrow accounts
and prepayment of taxes and insurance as a way of protecting their
interest. They want to be sure these obligations are met. Unfortunately,
most lenders pay little or no interest on your account, so the
money you prepay doesn’t grow.
How escrow works
Each month, you pay 1/12 of your annual tax
and insurance bills along with your basic mortgage payment, plus
the extra amount the lender requires in reserve. Here, if the
annual total were $3,700, you’d pay at least $300 a month
into your escrow account.
