Should You Pay Property Taxes and Insurance Bills on Your Own?
If you face trouble making your monthly taxes and insurance bills, your mortgage broker may suggest setting up an “escrow” account. They may also introduce you to “impounds” when recommending an escrow agreement. You may face a little difficulty understanding these terms and how they work, especially if you are new to mortgage loans.
To help you, we have shed some light on escrow account and whether you should go for it or pay on your own:
What are escrow accounts?
Simply put, escrow accounts, or sometimes called impound accounts, are third-party-managed accounts that are set up by your mortgage company to collect some extra dollars along with your monthly mortgage payments. The extra money is used to pay for your homeowner insurance and property taxes when the bills come due. These additional fees are known as impounds. Mortgage lenders recommend paying your taxes and insurance bills through escrow to make sure that the bills are paid on time.
When you get into an escrow agreement with your mortgage lender, you may also be required to deposit one- or two-month’s mortgage in your escrow account as a buffer for tax and premium increases. Your mortgage company may also break down the annual fee into 12 monthly payments, adding them to your mortgage payments. If you look at your mortgage loan statement, you may see the term PITI, which stands for principal, interest, taxes, and insurance. With an escrow agreement, you are paying for all these charges with a single monthly payment. You can learn more about Metropolitan Mortgage Corporation on this page here.
To understand how an escrow account works, let’s take a look at this example.Say your yearly property taxes are $6,000. You will pay $500 each month to cover this expense. This money will be deposited into your escrow account by your mortgage broker. If your homeowner insurance annual premium is $1200, you will be required to pay $100 each month to add to your escrow account. This means that you will be paying $600 extra to cover your property taxes and insurance bills each month.
What are the benefits of escrow?
Setting up an escrow account gives mortgage companies assurance that you will be able to pay your property taxes and homeowner insurance bills when due. For homeowners, it offers convenience and peace of mind. If they are not disciplined to save money, property taxes and insurance premiums can sneak up on them and put them in a financial crisis. However, with escrow, they don’t have to worry about making huge payments in a lump sum, which adds pressure to their finances.
Why pay on your own?
Some mortgage borrowers are confident enough to pay for these impounds on their own. They may refuse to set up an escrow account, even though they know that it can offer them peace of mind. This is because they don’t earn interest on the money deposited into an escrow account. However, when they choose to pay those bills on their own, they can deposit their savings into a separate account and earn interest on the total amount before it goes to the taxing authorities and insurance companies.
All in all, it’s much safer and easier to allow your mortgage broker or lender to handle your property taxes and homeowner insurance bills. But it’s worth noting that, in either case, you are solely responsible for making payments for those bills.
