Question:

What are the pros and cons of having an escrow account for mortgage?

Answer:

The major advantage and disadvantage of having an escrow account for mortgage is that the lender will be paying your property taxes and insurance.

Actually, having someone pay taxes and insurance for you is a great way not to have to worry about too many bills. And as it is more convenient to set aside a hundred bucks each month rather than paying $1200 once a year, is very convenient, too, given the lender makes payments on time.

With an escrow account for mortgage, you make your monthly PITI payment (principal, interest, taxes, insurance), and the taxes and insurance are not applied towards your mortgage debt. Rather, they go to the mortgage escrow account and are applied towards property taxes and insurance when those items are due.

Pros of Having an Escrow Account for Mortgage

It all seems very nice and it is so convenient to have the lender do this on the borrowers' account. If the lender makes the payments when they come due, the escrow account for mortgage can save you from possible trouble. With or without interest accruing on the escrow account, it is still a nice way to handle tax and insurance bills.

Cons of Having an Escrow Account for Mortgage

However, on the rare occasion when lenders will fail to distribute payments on time, the borrower may suffer damage and even get a foreclosure notice from the state. As borrowers are not insured against lender default on escrow funds, it may become a horrific situation.

There is no way to predict whether the lender's payment systems will collapse during the lifetime of your loan, or at least for the time you are stuck with an escrow account for mortgage. The nice thing is, you could negotiate with lender to cancel the escrow account when your equity increases over 20%. That is, when you no longer have to pay PMI (private mortgage insurance).

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