When you finance your home with a mortgage, your lender will likely require you to maintain an escrow account. With this setup, a portion of your monthly mortgage payment is set aside to cover your annual property taxes and home insurance premiums.
Lenders want to protect their financial investment when they loan you money; an escrow account acts as a forced savings account to ensure those property expenses are paid on time and in full, says Ed Santiago, a branch manager with Fairway Independent Mortgage in Wayne, Pa.
Lenders hold back one-twelfth of the estimated annual expenses each month to pay your taxes and insurance. Some lenders require an additional cushion of up to two months' worth of expenses to avoid potential escrow shortages. If you end up with an overage because you get a cheaper insurance policy or your property taxes decrease, your lender will send you a refund check.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Because property-tax assessments and insurance rates tend to rise over time, the amount collected for escrow can fluctuate. So while your principal and interest payments remain the same for the life of a fixed-rate mortgage, your total monthly payment may change from year to year.
Homeowners felt the sting of both higher property-tax bills and soaring home insurance premiums in 2024. According to data from Intercontinental Exchange, home insurance premiums rose by an average 14% from the previous year, and 2024 property-tax bills jumped 2.7%.
Escrow rules
Government-backed mortgages — Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans — require escrow accounts regardless of the down payment amount.
For conventional loans, most lenders require an escrow account if you put down less than 20% on the home purchase. In some cases, though, you can get an escrow waiver with a loan-to-value ratio of 95% or less, a good credit score, and no recent mortgage payment delinquencies or defaults on past escrow waivers. However, you’ll pay 0.25% of the loan amount for an escrow waiver.
A waiver makes sense only if you have sufficient disposable income to cover larger (but less frequent) tax and insurance payments and the financial discipline to keep up with them independently, Santiago says. Check how often your locality collects property taxes — some collect only once or twice a year, leading to bigger bills, while others collect quarterly.
If you get an escrow waiver, you could put money to pay your insurance and tax bills in a high-yield savings account, earning interest on the funds. (But for this to be worthwhile, your interest earnings would need to be greater than the fee to waive escrow.)
Additionally, if you switch home insurance providers or successfully appeal your home's assessed value for property taxes, you may not face as much hassle and paperwork. But most loan servicers offer online account management, so updating your account isn't as cumbersome as it used to be, Santiago says.
And the flexibility of managing escrow expenses on your own isn't without some risk. Failing to pay your property taxes could result in your county filing a tax lien against your home, potentially leading to foreclosure.
Likewise, if you don't pay your homeowners insurance premiums and let the coverage lapse, you're breaching your agreement to maintain home insurance as a condition of taking out a mortgage. In that event, your loan servicer can require force-placed homeowners insurance, which is usually costlier and less comprehensive, Santiago says.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related Content
-
I'm 54 with a $320,000 IRA and will soon be self-employed, earning about $120,000 per year. How much should I be saving for retirement?We asked financial experts for advice.
-
This High-Performance Investment Vehicle Can Pump Up WealthLeave online real estate investing to the beginners. Accredited investors who want real growth need the wealth-building potential of Delaware statutory trusts.
-
I'm a Real Estate Investing Pro: This High-Performance Investment Vehicle Can Move Your Wealth Up a Gear
Leave online real estate investing to the beginners. Accredited investors who want real growth need the wealth-building potential of Delaware statutory trusts.
-
You Don't Need a Billion to Retire in the Hamptons: Finding the Right Town for Your BudgetYes, it's favored by the rich and famous, but retiring in the Hamptons may not be out of your league. Here's a guide to affordability and and who is happiest living there.
-
What to Know About Portable MortgagesA closer look at how portable mortgages would work, who might benefit and why the concept is gaining attention amid high rates and limited supply.
-
10 Cities Where Grocery Prices Are HighestThese 10 cities are paying up to 33% more than the rest of the country to keep food on the table.
-
I'm an Investment Adviser: Here's Why You Should Resist a Zero-Down MortgageWhile it's certainly enticing, a zero-down mortgage comes with significant risks, especially if home values decline or you want to refinance.
-
Credit Score News Could Help First-Time HomebuyersLenders who sell mortgages to Fannie Mae and Freddie Mac used to only be able to use FICO for loan qualification. Now there's VantageScore, owned by the three major credit bureaus.
-
Four Military Benefits That Have Helped My FamilyMilitary life can be challenging for servicemembers and their families, but they're offered some significant financial benefits to help cushion the blow.
-
A Compelling Case for Why Property Investing Reigns Supreme, From a Real Estate Investing ProInvestment data show real estate's superior risk-adjusted returns and unprecedented tax advantages through strategies like 1031 exchanges and opportunity zones.
