What goes into an escrow account and should I escrow?

When you get a home loan, whether you are buying or refinancing, you have the option to have an escrow account. For a government loan(FHA or VA), you have to open an escrow account.

What goes into an escrow account?

Property Taxes: Take your property taxes for the year, and divide it by 12 for your monthly payment. You will always have an extra 2 months of tax payments in your escrow account. Typically, you will pay the entire year for insurance (this is to protect you from accidentally forgetting a payment, and God forbid something happens to your home and you didn't pay your monthly insurance bill...)

Is it a good idea to start an escrow account?

Well, if you have a FHA or VA loan, you must have an escrow account according to guidelines so your choice has already been made for you.

Now, if you are getting a conventional loan, this is an important decision you need to make. I won't make the decision for you, but I will give you some thoughts on it:

-If you do not decide to start an escrow account, you will have to pay .25% of your home loan when you close. If you have a $100,000 home, that is $250.

-Whoever holds the escrow account invests the extra money into the market and makes money on it. This means that YOU are NOT making money on that money. Is it better to invest your money on your own? Can you make up the difference from that $250 you paid at closing?

-Because you are paying your entire year of insurance, you don't have to worry if your payment is made each month. You have already, in a sense, paid someone to take care of that for you. If you like to have piece of mind, this is something to think about.

-Taxes are not due until the end of the year. If your taxes are $2,000, it could be difficult to come up with that money at the end of the year while you are trying to get through the holidays. It is much easier to come up with $187.50 every month than a lump sum of $2000 at the end of each year.

-When establishing an escrow account, you have to come up with a good amount of money ($1-2000 depending on your taxes and insurance payments). Do you want to save that money at closing?

These are all just things that you need to think about when your lender asks if you want to open an escrow account. Remember that your loan officer is not making money off of your escrows so ask them to help you make the right decision. That is what your loan officer is there for, to HELP YOU!