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Short Summary
Main recommendation: Keep an escrow account, since it is a savings account the mortgage company uses to pay property taxes, homeowners (hazard) insurance, and mortgage insurance when needed, and the speaker says most borrowers use one. Escrow payments are collected monthly and disbursed when the bills come due, so you are not paying the same bills twice even though it can look that way on your statement.
Key Points
- An escrow account is held by the mortgage company, and each month a portion of your payment goes into it for property taxes, homeowners insurance, and mortgage insurance if needed.
- Taxes are paid to the county twice a year, while the annual homeowners insurance bill is paid once a year, so the monthly collections build up a balance to cover those lump sums.
- In the example given, at closing the lender collects the upcoming property tax installment, has you pay a full year of homeowners insurance through closing, and adds a couple months of reserves as a buffer, which is why statements can look like you're paying for over a year of coverage at once.
- Escrow amounts are reviewed each year in an escrow analysis, which can lead to a refund or a higher or lower monthly payment depending on whether taxes or insurance changed.
- Some lenders allow you to waive escrows, but the speaker's personal opinion is that the convenience of having the bills paid for you usually outweighs the interest you might earn on savings.
Details Worth Noting
- Example from the video: On a $400,000 purchase with 10% down ($360,000 loan at 2.99% over 30 years), principal and interest is about $1,516 per month, taxes $5,000 per year ($417/month), hazard insurance $720 per year ($60/month), and mortgage insurance about $51/month, for a total of roughly $2,044 per month, with about $528 per month going into escrow.
- Escrow shortages can occur when property taxes rise, for example due to a special assessment like Mello-Roos, and the lender may then increase the monthly escrow and collect an extra amount to catch up, with the speaker giving a rough illustrative figure of around $42 per month for 12 months.
- If the analysis shows an overage, the lender may send a refund check and lower the monthly payment going forward.
- The speaker notes that savings interest rates were low at the time of recording, which is part of the reason he favors escrows.
Bottom Line
Escrow accounts are a built-in savings method that spreads large annual and semiannual bills into manageable monthly payments, and the statement balances can look confusing but generally reflect prepaid reserves rather than duplicate charges.
