HOW CAN I AVOID ESCROW PAYMENTS?

"Should you escrow?.. "

"To Escrow, or not, that's the question!.. "

Escrow Payments - If you haven't read any other pages on this sight, you may not quite understand what "escrow" even means. The word actually has many different meanings in real estate, but regarding your monthly mortgage payment, "escrow" is a pretty simple concept.

"Escrow" is the method your lender uses to collect payment of your property taxes and your home owner's insurance. Your annual property tax bill and your annual home owner's insurance premium are added together and then divided into twelve equal monthly payments. For convenience sake, these "escrow payments" are added onto your monthly mortgage payment and held in an "escrow account" for you. The lender will withdraw from the "escrow account" twice a year—once to pay your taxes, and once to pay your insurance. There is more to it, but that's "escrow" in a nutshell. It's just basic math—addition (tax bill + insurance premium) and division (total of tax and insurance divided by twelve).

Now that you have an idea of what "escrow" is, your question is, "Can I get out of having to pay those escrow payments? The short answer is, "Yes." But there are conditions. 1. You must have at least 20% equity in your home, and 2. You must use the right lender. Some lenders require you to escrow for the life of the loan, while others allow you the option to escrow or not escrow when you reach 20% equity.

20% Equity

Equity is the amount of ownership you have in your home measured in dollars. Until you pay off the mortgage, you and the lender "share" equity. As you make payments, you build more and more equity for yourself, and share less and less equity with the lender. For example, if your house is worth $200,000, and you have lived in it long enough to pay the mortgage balance down by 20% (or $40,000), then you have 20% equity—you have built $40,000 worth of ownership. The lender has the other $160,000 worth of ownership. To clarify, you would have 20% equity in a $200,000 home when the mortgage balance (the amount you owe the bank) reaches $160,000.

When you reach the 20% equity mark, many lenders will allow you to stop making escrow payments. My question to you, though, is "Why would you stop escrowing?" Borrowers are legally bound to pay property taxes every year, and are also legally bound to have the home insured until the mortgage is paid off. These are two expenses that are unavoidable—YOU HAVE TO PAY THEM.

Since, taxes and insurance are unavoidable expenses, why not stay in the escrow program, paying a little bit along the way so that the money will definitely be there when the bills come due? If you opt out of the escrow program, you will still have to pay these expenses, but you will have to pay them in a lump sum every year. How many Americans have a few thousand dollars sitting around that they can shell out once a year for taxes and insurance?

Most Americans do not have the financial discipline to put a little aside each month towards anything. As a matter of fact, most Americans live paycheck to paycheck with nothing left over. Escrowing forces that discipline on the borrower—not a bad thing in this case. I say, let the lender do their job and collect those escrow payments from you so that you don't have to stress over it. Don't we have enough financial stress in our lives as it is?

mortgage terms