For many homeowners, an escrow account is part of their monthly mortgage payment used to collect funds to pay property taxes and homeowners insurance. While it can simplify things, not everyone prefers having escrow. The decision to remove escrow from a mortgage depends on personal financial habits, comfort with managing large bills, and the lender’s rules. Understanding the pros and cons can help determine whether managing your own taxes and insurance is the right move for your financial situation.
Understanding Escrow in a Mortgage
What is an Escrow Account?
An escrow account is set up by your mortgage lender to hold money for property-related expenses such as real estate taxes and insurance premiums. Instead of paying these large bills directly, you pay a portion of them monthly as part of your mortgage payment. The lender then pays the bills when they’re due.
How Escrow Works with Your Mortgage
Your total monthly mortgage payment usually includes:
- Principal: The portion that goes toward paying off the loan
- Interest: The cost of borrowing money
- Taxes: Property taxes held in escrow
- Insurance: Homeowners insurance premiums also held in escrow
This all-in-one structure simplifies payments and ensures your bills are paid on time.
Reasons Homeowners Consider Removing Escrow
More Control Over Your Money
Some homeowners prefer to manage their own payments rather than leave it up to the lender. This allows you to choose exactly when and how to pay your insurance and taxes, potentially giving more flexibility in budgeting and cash flow.
Interest on Held Funds
When lenders hold your money in escrow, it generally does not earn interest. By removing escrow, you could keep that money in a high-yield savings account and earn a return until the bills are due.
Reduced Monthly Payment
Without escrow, your monthly mortgage payment decreases since it no longer includes taxes and insurance. This can provide a short-term benefit in your monthly budget, although you still need to prepare for the lump-sum bills yourself.
When It’s Possible to Remove Escrow
Lender Requirements
Not every borrower is allowed to remove escrow. Lenders usually have guidelines that include:
- A loan-to-value (LTV) ratio under 80%, meaning you have at least 20% equity in your home
- A strong history of on-time mortgage payments
- No current delinquent taxes or insurance
Loan Type Restrictions
If you have a government-backed loan like FHA or VA, you may not have the option to remove escrow, as it’s often required for the life of the loan. For conventional loans, however, the option is more commonly available after reaching certain equity thresholds.
Requesting Removal
To remove escrow, you’ll typically need to contact your lender in writing. Some may charge a fee, and others may require proof that you’re capable of managing the taxes and insurance yourself. Be prepared to show financial responsibility and plan ahead for future bills.
Advantages of Removing Escrow
Greater Financial Flexibility
You gain more control over when to pay your bills. This can be useful if you want to time payments for tax or investment purposes, or if your income fluctuates throughout the year and you need more flexibility in managing expenses.
Potential Investment Benefits
By holding the escrow funds in a personal savings or investment account, you could potentially earn interest or returns over time. While the gain may be modest, it’s an advantage over the zero interest in most escrow accounts.
Fewer Surprises in Payment Adjustments
Escrow accounts are reviewed yearly, and if your property taxes or insurance increase, your lender will adjust your monthly mortgage payment accordingly. Managing these payments yourself gives you direct oversight and avoids sudden increases in monthly obligations.
Disadvantages of Removing Escrow
Risk of Missed Payments
If you’re not organized, there’s a chance you could forget to pay property taxes or insurance, leading to penalties, lapses in coverage, or even tax liens. Escrow ensures these critical bills are paid on time without needing to track them manually.
Larger Lump-Sum Expenses
Without escrow, you’re responsible for saving enough to pay large bills sometimes several thousand dollars on your own. This requires discipline and good financial planning to avoid being caught unprepared.
No Budget Predictability
Escrow smooths out large, irregular expenses by dividing them over 12 months. Without it, your monthly expenses might be lower, but your budget will need to account for big payments at specific times of the year, which can disrupt cash flow.
Who Should Keep Escrow?
First-Time Homebuyers
If you’re new to homeownership, escrow can simplify your responsibilities and ensure you don’t miss key payments. It acts like a built-in budgeting tool that requires no extra planning.
People With Tight Budgets
If you’re not confident in your ability to set aside money consistently for property taxes and insurance, escrow can be a safeguard against overspending or accidental default.
Those with Variable Property Taxes
In areas where property taxes fluctuate often, escrow can help absorb the impact over time instead of creating sudden large bills. The lender deals with the changes and adjusts accordingly.
Who Might Benefit from Removing Escrow?
Experienced Homeowners
People who are financially savvy and already used to managing bills may prefer removing escrow to have more control and possibly invest the money themselves.
Homeowners with High Liquidity
If you maintain strong cash reserves and can handle large, infrequent payments without stress, removing escrow could offer advantages in terms of flexibility and control.
Those in Low Tax or Insurance Areas
If your tax and insurance payments are relatively low or predictable, managing them yourself might not pose a significant burden and could be worth the extra responsibility.
How to Prepare If You Remove Escrow
Create a Dedicated Savings Plan
Set up a separate savings account specifically for your taxes and insurance. Deposit money monthly so that when the bills arrive, you have the full amount ready to go. Automating these deposits helps ensure you stay on track.
Use Budgeting Tools
Consider using personal finance apps to track and plan for upcoming payments. Set calendar reminders well ahead of due dates and monitor any changes in tax assessments or insurance premiums.
Review Your Bills Regularly
Stay updated on changes in your property taxes or insurance policies. Knowing what to expect prevents surprises and allows time to adjust your savings or challenge billing errors if needed.
Deciding whether to remove escrow from your mortgage comes down to your comfort level with managing large financial obligations on your own. For some, it offers the freedom and potential for better financial control. For others, it adds unnecessary risk and complexity. Before making a decision, evaluate your financial habits, consult with your lender about eligibility, and make sure you have a clear plan in place to cover taxes and insurance without relying on the built-in structure of an escrow account. With the right preparation, removing escrow can be a smart move but it’s not right for everyone.