Real Estate Tip: Escrow Accounts -- Do You Really Need Them?If you have a mortgage on your property, whether it's for your personal residence or a real estate investment, chances are you have an escrow account. But if you are working on building wealth through real estate, you may want to take a hard look at your escrow account (or accounts, if you own more than one piece of real estate) and decide if you really need it. Escrow accounts, also known as impound or reserve accounts, are often maintained by mortgage lenders on behalf of their borrowers. They typically work like this: the borrower's monthly payment covers the loan principal and interest, as well as a prorated amount that is deposited into the escrow account. The lender holds those funds and uses them to pay taxes and insurance for the property when those bills come due on an annual or semiannual basis. There are a number of benefits to both lenders and borrowers. Serious problems can arise when taxes and insurance bills are not paid, so having that money in escrow helps reduce the lender's risk. The lender also benefits by having funds on deposit; most states don't require lenders to pay interest on escrow accounts, but they can certainly earn money on them. And secondary market buyers who purchase mortgage notes generally pay more for loans that have escrow accounts. Many borrowers prefer the convenience of spreading the payment of a big bill over 12 months instead of having to make it at one time. Also, the lenders take care of tracking tax and insurance bills, so the borrower doesn't have to. However, if the value of the property is high--creating correspondingly high tax and insurance bills--the borrower is losing interest. Or, if you are a real estate investor with multiple properties, the total of your escrow accounts could be substantial. For example, if your taxes and insurance run a total of $12,000 a year and you have an escrow account, you're losing hundreds of dollars in simple interest and even more if you were to put that money in a higher-yield investment. And when you own several properties, the cost of the convenience of an escrow account increases accordingly. As part of your overall wealth-building strategy, you could put that money in a short-term investment (perhaps a property you intend to quick-turn) and let it work for you until you have to pay your taxes and insurance. Policies on escrow accounts vary by lender and according to state law. Generally, escrow accounts are required when the loan-to-value ratio is 80 percent or higher. Some lenders charge a fee to waive the escrow account; before accepting such terms, be sure the cost of waiving escrow is less than the potential earnings from the interest. Finally, be sure you have the discipline and resources to pay your property taxes and insurance on time before you take the step of eliminating your escrow account.
MORE RESOURCES updated Thu. March / 28 / 2024 Mortgage Interest Rates Today, March 28, 2024 | Rates Are Down This Week. Will They Stay That Way? Business Insider 3 Times Refinancing Your Home Makes No Sense The Motley Fool Types of Mortgage Refinance Options Bankrate.com Will Mortgage Rates Go Down in 2024? What Homebuyers Should Expect Business Insider How to Refinance Your Mortgage NerdWallet Underwater Mortgage: What To Do Bankrate.com Mortgage Refinance Rates: Compare Current Rates Business Insider Mortgage Interest Rates Today, March 27, 2024 | Rates Down Slightly as Homebuying Season Ramps Up Business Insider When to Consider Refinancing Your Mortgage Business Insider 30-year refinance rates: What to know CNN Underscored The best mortgage lenders for refinancing in March 2024 CNN Underscored 15-Year Mortgage Refinance Rates: Compare Current Rates Business Insider Should You Refinance Your Mortgage In 2024? Bankrate.com Mortgage Relief and Mortgage Assistance Programs [2024 ] The Mortgage Reports Current mortgage refinance rates CNN Underscored Best Mortgage Refinance Lenders In 2024 Bankrate.com Current mortgage interest rates: Mortgage rates today CNN Underscored MBA: Mortgage Applications Decreased in Weekly Survey Calculated Risk Best Mortgage Refinance Lenders of March 2024 Business Insider Refinance Requirements: What You Need to Refinance Your Home in 2024 The Mortgage Reports When to Refinance Mortgage: Is it Time? - Buy Side from WSJ The Wall Street Journal Mortgage Rates This Week NerdWallet Cash-Out Refinancing: How It Works, When To Do It Bankrate.com Conventional Refinance Rates and Guidelines for 2024 The Mortgage Reports How Soon Can You Refinance a Mortgage Loan? 2024 Rules The Mortgage Reports How To Refinance An Underwater Mortgage Bankrate.com How Soon Can You Refinance a Mortgage? NerdWallet Mortgage Rates Chart | Historical and Current Rate Trends The Mortgage Reports Current 15-year refinance rates — and lenders that offer them CNN Underscored Best Refinance Lenders of March 2024: Refinance Your Mortgage The Motley Fool Can You Refinance With No Income Verification in 2024? The Mortgage Reports Should I Refinance My Mortgage Now? When to Refinance As Rates Drop Business Insider What Credit Score Do I Need To Refinance? Bankrate.com Office of Research blog: A look at cash-out refinance mortgages and their borrowers between 2013 to 2023 Consumer Financial Protection Bureau The Sales Pitch for an 8% Mortgage: Buy Now, Refinance Later—for Free The Wall Street Journal How To Get The Best Refinance Rate Bankrate.com CFPB Releases Study of Refinance Mortgage Loans Between 2013 and 2023 Consumer Finance Monitor Should You Refinance Halfway Through Your Mortgage? Bankrate.com Mortgage Interest Rates Today, March 20, 2024 | Could Rates Drop After the Fed Meeting? Business Insider Mortgage Rate Forecast February 2024 Bankrate.com Mobile Home Refinancing | Loans & Rates 2023 The Mortgage Reports
|