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What is a mortgage escrow?

We checked in with Loan Officer Chelsea Stanton to find out what exactly is Mortgage “escrow” and she says, “Nope, we’re not talking fancy French food, that’s escargot, and those lil’ snails are a personal favorite of mine! If you haven’t been to Citron European Bistro in Tacoma I highly recommend!”

She continues, “In mortgage terms an escrow account is essentially a savings account that pays out your taxes, homeowners insurance and mortgage insurance if applicable as needed to keep your home up to date on everything needed. You are NOT required to have these payments taken care of by escrow, you can pay out of pocket – but why would you CHOOSE to, or NOT want to?”

Advantages of mortgage escrow

  • Taxes and insurance are paid on time through the escrow account, this means no stress for you and only you only have to make your regular monthly payment versus making sure to pay annual Homeowners insurance, and taxes as applicable on time. (Some states have taxes paid annually, while others are 2 plus times a year)
  • You don’t have to do anything to manage this account, taxes and insurance are reported annually to your servicer
  • Not paying taxes on time can cause a lien to be placed on your property or possible foreclosure – Not paying insurance on time can cause your entire loan amount to be called due (be fully paid off). An escrow account ensures this will never happen. It is VERY important to always have your real estate taxes and insurance up to date to avoid foreclosure or issues with any potential insurance claims. 
  • In the event of a shortfall your mortgage servicer will cover the difference temporarily and your monthly payment will increase to make up for it (typically annually)

Disadvantages of mortgage escrow

  • If you have high interest bearing accounts, it’s possible to keep the funds you would normally escrow in that account and be gaining interest on them.
  • Typically not having an escrow account is an ‘added layer of risk’ and your lender may have a charge to not have an escrow account. In the event of a catastrophe and you cannot make a payment your escrow account ensures the property is covered with insurance as well as taxes. 
  • As taxes and homeowners insurance change annually your payment may vary from the original amount you planed on. If you are already at your max comfortable amount, this could cause added financial stress.
  • You need to be diligent about savings for your taxes and insurance to make sure all payments are made on time

Long story short Stanton says, “I personally have an escrow on my mortgage account; with all the other things to keep up on in this crazy world, I feel safer having one and it’s one less thing for me to worry about while I go enjoy a Croque monsieur, Seafood pasta and some snails!”

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