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Can I Handle My Own Escrow?

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Posted On: 05/20/2015

QUESTION:

Instead of an escrow account run by a lender, I’d like to pay my own property taxes and insurance. Why is it that mortgage lenders do not allow such arrangements?

ANSWER:

An escrow account is a trust account. Lenders or their mortgage servicers collect money each month as part of the mortgage payment to pay for insurance and taxes, and, sometimes, other costs. If you borrow with less than 20 percent down virtually all lenders will want an escrow account to reduce the risk they might face if property taxes or insurance are not paid.

Escrow accounts, however, are not mandatory. Lenders allow borrowers to pay their own property taxes and insurance – just borrow with at least 20 percent down and in most cases you will be entirely free to pay for taxes and insurance without an escrow account. The catch, of course, is that most borrowers do not purchase with 20 percent down. The average down payment last year was 14 percent, or $32,141, according to RealtyTrac.

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There was a time when I though escrow accounts were a bad deal, in large measure because savings accounts paid lofty interest levels. Those days are plainly over, but more importantly the economy has changed in other ways. For instance, every state saw its middle class shrink between 2000 and 2013, according to new research from the Pew Charitable Trusts.

Because of changing economics escrow accounts now make a lot of sense because they can be seen as a form of budgeting, even for those who put down more than 20 percent. With an escrow account money is collected every month so the borrower never faces the need to instantly raise a few thousand dollars – or more – for tax payments or insurance bills.

Moreover, with the money in place to pay bills in a timely manner there are no worries regarding late fees or credit dings. It’s the loan servicer’s job and responsibility to assure that payments are made in full and on time.

If you’re really bothered by escrow accounts then save up for a big down payment. Otherwise, the odds are overwhelming that an escrow account is in your future.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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