Should You Skip Your Mortgage Lender’s Escrow Account?

When closing on a home loan to help pay for your home purchase, you may find that your lender requires you to have an escrow account with them. In some cases, you can opt out, though you may not want to.

Unlike a transaction escrow account that is held between you and the home seller—which is just about making sure the right money goes to the right person at the right time—mortgage escrow accounts (also sometimes called impound accounts) function as a sort of automatic bill-paying service, covering your property taxes and homeowners insurance. 

Depending on how much money you put down for your loan or how much you’ve paid off during the life of it, you may have the option to go without these accounts. But is it a good idea to have one anyway? 

The point of mortgage escrow

When you buy a home, you’re typically on the hook for more than just the purchase price. You’ll also need to pay property taxes and homeowners insurance, among other costs. If you need a mortgage to make your purchase, your lender has a major interest in you paying those costs—otherwise, you might lose your home, which would be trouble for them, too. 

So, when you have less than 20% down on a home loan, your lender might require you to put money for your taxes and insurance into their escrow account, and they’ll make sure those bills get paid. 

To calculate your escrow payments, your lender estimates your annual property taxes and insurance costs, divides by 12, and adds a small cushion (usually 1-2 months' worth). For example, $6,000 in annual taxes and insurance becomes about $500-$600 per month added to your mortgage payment. Your lender reviews these costs annually and will adjust your monthly payment up or down—you might get a refund check if they collected too much, or face a higher payment if taxes or insurance premiums increased.

You can waive your escrow account—sometimes

Whether you can skip your escrow account depends on your loan type and how much equity you have in your home.

On government loans such as FHA, VA, and USDA, you're typically required to keep funds in escrow for the life of the loan—no exceptions.

On conventional loans, you may be able to opt out once you have over 20% equity in your home. However, many lenders will charge you a fee (usually 0.125% to 0.25% of your loan amount) or require a slightly higher interest rate to waive escrow.

"Waiving escrow is a higher risk threshold for a lender because they are trusting that you will pay the taxes and insurance as required," says Mason Whitehead, a mortgage loan officer with Churchill Mortgage. "So, it frequently shows up in the pricing of a loan."

The more equity you have, the more likely your lender will waive the escrow requirement for free. Some lenders offer free waivers at 25% or 30% equity, while others may charge the fee regardless. 

The upsides to your lender handling these expenses

If you’re required to have an escrow account, it’s best to look on the bright side and consider the benefits. Even if you aren’t required to have one, there are some clear advantages to letting your lender handle these expenses. The clearest one is: You’ll never have to worry about missing a payment on those bills again. 

“Think about a mortgage escrow account like a piggy bank that your lender takes care of,” says Fred Loguidice, founder of Sell My House Fast Tampa. “When those big annual or semiannual bills are due, your lender taps into the funds in that account and pays them for you. This keeps your house, which is collateral for the mortgage, insured and tax lien-free year-round.”

Missing these payments could mean late fees, credit score dings, tax liens placed on the property, lapsed coverage, or even foreclosure by the lender. 

Beyond getting these payments made for you, there’s an aspect of forcing yourself to be financially responsible in order to fill up that piggy bank. 

“Escrowing is also known as a ‘budget mortgage’ because it forces you to budget for taxes and insurance monthly,” says Whitehead. “For those who have a hard time budgeting and setting money aside for things, I highly recommend this option.”

Indeed, even for those of us who love a spreadsheet, a regular payment that covers these important expenses may be preferred over getting a sudden, huge tax bill in the mail, or realizing that your home is uninsured because you accidentally turned off autopay. 

There are some downsides to escrow accounts, too

If you’re required to have an escrow account, there’s little use in complaining about it. But if you don’t need one, it’s worth considering the downsides of the practice. 

There is the fact that you are not entirely in control of your money, in an environment where you may want to be as liquid as possible to cover expenses that crop up. 

The biggest financial drawback, however, is that the money you’re putting into escrow isn’t working for you at all—meaning it isn’t collecting interest in a bank account, or being used as part of an investment. 

“You're basically giving your lender an interest-free loan using your own money,” says Loguidice. 

You'll typically also be required to deposit a few months' worth of payments as a cushion when you close, meaning you have to front-load what can amount to $3,000-$10,000 or more, depending on your property taxes and insurance costs.

So, should you let your lender handle it? 

As with most financial decisions, this one really depends on your personal situation and your monthly cash flow. In addition, consider your own budgeting abilities here and decide whether it might be better to offload that task to your lender. 

The obvious benefit to handling the payments yourself is your control over your money, especially when that money can be variable.

“For some clients whose jobs pay big bonuses or commissions, they like to self-escrow so they can put money aside when those bigger checks come in,” says Whitehead. 

But depending on the market, your money may not be able to work very hard for you anyway—such that even one missed payment could lead to penalties that wipe out whatever you did make in interest.

"When savings account and money market interest rates are low, there is not much of a benefit in keeping the money in your own accounts each month as you’re not making much interest on that money,” Whitehead adds. 

Depending on your loan and your financial situation, you could be required to have a mortgage escrow account—taking the decision out of your hands. If you do have a choice, the dichotomy is simple.

“If you're a person who would ignore saving and would find yourself with a gigantic bill, the benefit of using escrow is worth it. If you're a good budgeter who wants every dollar to count, having the management of your escrow money is an excellent financial decision,” says Loguidice. 

Just know that if you go it alone and miss your payments, you’ll have no one to blame but yourself.