When refinancing a home loan, one of the many decisions that you'll have to make is whether or not to escrow your homeowner's insurance and property taxes. Some say yes, others no. Which option is right for you?

When you refinance your mortgage, the money seems to fly out the door. Every decision is important and expensive. One of the decisions that you must make is whether you want to put your taxes and insurance into escrow or not. Although it may just seem like another way for the bank to take money out of your pocket, escrow can be a great boon for homeowners.

Understanding escrow

When you pay your monthly mortgage payment, your taxes and insurance are kept in an account held by your mortgage company. This is called your escrow account. When these bills are due, the bank pays them for you in a timely manner. Some lenders require you to escrow in order to grant you the loan. Others will let you take care of the bills yourself. Which is best for you?

Reasons to take control

When you refinance, you may resist choosing the escrow path because it's more money out of your pocket. But if you're very organized and always remember to pay your homeowner's insurance and taxes on time, there may be no need to escrow. In fact, you could invest that money and let it grow for you until it's needed. Also, if you choose not to escrow, your closing costs may be lower, because lenders usually require money for taxes and insurance up front. However, if you choose not to escrow, you may have a higher interest rate on your home loan. If this is the option you choose, set up an account where you can save for your tax and insurance bills. If you forget to make that one insurance payment and there's a catastrophe to your home, you could be in real trouble.

The pros of escrow

There are several benefits to escrowing your taxes and insurance, and they all offer less stress in your life. When you escrow, someone else remembers to pay your homeowner's insurance when due, and there's no scrambling around to find the money to pay your property taxes every quarter. In many areas of the country, property taxes are so high that paying those huge bills can be hard on any budget. But when you automatically pay them each month with your mortgage, it's much easier on the wallet. Also, the lender is responsible to properly budget for unexpected increases in your taxes or insurance premiums. Another benefit of escrow is that some lenders will offer reduced interest rates on your home loan.

What's right for you? Every situation is different. The option with the least risk is to escrow your taxes and insurance, which results in a lower interest rate for your home refinance loan, fewer bills to manage, and a greater sense of relief by letting someone else worry for a change.

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Published on January 22, 2008