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Should I Stop My Mortgage Escrow?

By: Steve Johnson

6/4/2009 - 105 Comments

Last month I got a letter from the bank holding my mortgage saying that I can discontinue my mortgage escrow account.

Apparently there is a law in MN that says that after paying five years of a mortgage, the bank no longer has to manage an escrow account with a mortgage.  An escrow account is a pool of money collected with a monthly mortgage payment that is used by the bank holding the mortgage to pay the property taxes and homeowners’ insurance premium.

An escrow account reduces the risk of a homeowner not paying their property taxes or homeowners insurance.  Most banks will give a lower interest rate to borrowers if they agree to an escrow account because it lowers their risk of foreclosure. 

So, the question is should I cancel my escrow account or not?  Here are some of the advantages and disadvantage that I can think of.

Advantages of Escrow

The obvious advantage is that I only have to pay one bill each month and the bank takes care of saving some of the money each month in an escrow account and making sure my property taxes and homeowners insurance is paid.  

Without an escrow, I will have to manage my cash flow so that I will have enough money to make my property tax and homeowners’ insurance payments twice a year when they are due - another bill to remember. 

Disadvantages of Escrow

An escrow account increases my monthly mortgage payments by $200-$300. The escrow money is put in an account with the bank and therefore I lose the opportunity to invest this money and earn any income with it.  This could also help pay off my mortgage sooner.

An escrow account causes my monthly mortgage payment to change with my property taxes.  My mortgage payment is automatically withdrawn from by checking account, but I don’t like when it changes because I have to adjust by checkbook balancing with the new account.   Today, whenever my escrow account is underfunded or overfunded because of a change in property tax, the bank changes my monthly mortgage payment to increase or decrease the amount of money that is collected for my escrow account.  This is annoying to say the least.  If I were to pay my property taxes separate from the mortgage payment by cancelling my escrow, then my mortgage payments would no longer fluctuate. 

What would you do?

I am strongly considering cancelling my mortgage escrow primarily for the opportunity to invest this money and make an income before the money is needed.

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