Do I need an Escrow Mortgage?

An escrow account is simply an account managed by a disinterested third party for whatever is agreed by both parties.  For an escrow mortgage the bank wants to make sure you will make all of your payments required to maintain the house.  The bank would hate for you to make your finance payments, but forget your annual property taxes losing your investment and theirs to the government.  Here are a few of the common reasons an escrow mortgage may be required.

Property Taxes

Property taxes vary from state to state, plus local taxes.  This is the biggest fear for the lender because the government takes priority over everyone in collections or foreclosures.  The bank won’t deal with the hassles of a government trying to collect on back taxes.  A significant portion of your escrow account will be to cover you property taxes, but hey you won’t have to remember or even deal with it.  It will get paid on time.

Private Mortgage Insurance (PMI)

PMI is often added to an escrow account because the insurance company offers a better deal if paid yearly.  The PMI is not actually for the home owner, but the lender.  Therefore, the lender wants to make sure that payment gets paid so your loan is covered if you default.

Home Insurance

Home insurance is almost always required if you are asked to hold an escrow mortgage account.  If a disaster was to happen to your home without insurance what would stop you from not paying the mortgage.  There is nothing left for the bank to collect on.  That is why the lender wants to ensure that you insure.

Life Insurance

In rare cases a lender may ask that a term life insurance is maintained for the duration of the mortgage equal to the value of the mortgage.  This is usually only likely if your talents are the sole source of income and it’s a higher than normal loan value.  (Think rock star)  Disability insurance could be included in this bucket.


In areas of extreme cold and hot an estimate of the utilities cost can be asked to be maintained in an escrow account.  The main reason for this is to protect the home from damage caused by heat or cold.

Do I have to Escrow?

If you are a first time home buyer than you will almost have to have an escrow account.  You just likely don’t have enough credit history to prove to the lender that your loan is safe without it.  If you can drop the escrow the lender will usually charge 0.25% interest for the added risk.  If you’re borrowing $100,000 this interest rate increase will cost you $250. You need to have a good reason to justify saving the money yourself and then paying the payments.  The most common reasons is earning through investments and better cash flow for personal finances or a business.  Don’t convince yourself you’re going to start investing now, because you likely won’t.  If you invested before the loan than go ahead and keep investing.

Leave A Comment...