Wednesday, March 9, 2011

When Escrow is the Right Move in Refinancing

One of the major decisions you need to tackle when you’re about to refinance your home mortgage is to escrow your homeowner’s insurance and property taxes, or not. Opinions on whether either is the right move vary, but a lot does depend on your particular situation.

Decision-making during a refinance can be stressful and intensive. Each choice that you make is very critical and has consequences on your budget. At first glance, putting your insurance and property taxes into escrow may seem to be just another money sink, but there are certain advantages in choosing to do so.

What is Escrow?

The taxes and insurance from the monthly mortgage payments that you make to your mortgage company go directly into your escrow account. This way, when the bills from those are due, the bank settles them right on time. One thing to be aware of here is that some lenders actually require you to escrow before they approve your loan, while others will simply just have you settle those bills by yourself.

No to Escrow

Choosing not to escrow means you’ll get to save a bit more money than if you do so. If you’re punctual in paying your own insurance and tax bills, then this might be the right option for you. If you can organize your finances by yourself, you can actually invest money into a worthwhile endeavor and build up on it over time. Closing costs will usually be lower too, since otherwise, most lenders will ask money for insurance and property taxes. However, there’s a chance that your interest rate will be a bit higher.

Yes to Escrow

Conversely, if you’d rather not worry about making those payments on time by yourself, then escrowing is the better option. You can have someone else, such as a California escrow service, keep track of the due dates of those bills, and let them manage your money allotted for those expenses. Budgeting will also be easier, since quarterly property taxes tend to put a dent even in the most stolid finances. Having those taxes paid off monthly reduces the strain on your wallet. Lenders also favor escrowing, and they’ll be responsible in adjusting your budget in case of tax increases or premiums. They might also offer you lower interest rates on your mortgage, too.

Escrowing can be a tough decision to make by yourself so it’s always best to get the best financial advice from knowledgeable sources. However, it’s clear that choosing to escrow really reduces the risk you take in refinancing, so you should definitely keep that in mind.

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