The Pros and Cons of Escrow Accounts

If the prospect of paying a large property tax bill twice a year is daunting, consider the up and downsides of having an escrow account.


By: Tara-Nicholle Nelson

Related To:

Have you ever seen those visual puzzles where, depending on whether you focus on the figure or the background, the image looks like a vase or two silhouettes, a feathered hat or an old woman? Escrow accounts are similar -- how you see them depends largely on where you focus.

An escrow account, also called an impound account, is an account the lender uses to pay the borrower’s non-mortgage related property ownership expenses. The big expense covered by escrow accounts is property taxes, but they can also be used to pay homeowner’s insurance and homeowner’s association dues. At close of escrow, the borrower usually prepays a couple of months’ worth of taxes and insurance into the impound account; thereafter, the taxes,  insurance  and other costs are rolled into the mortgage payment and the lender breaks the single payment up and directs it to the appropriate payee.

Some see escrow accounts as a lender protection, put in place to avoid losing the collateral (i.e., the house) to unpaid tax liens or natural disaster, in the event of a lapsed homeowner’s insurance policy. Others see escrow accounts as protecting the homeowner’s interests from the same dangers and adding an element of convenience that simplifies the financial obligations of owning a home.

There are a number of implications that arise when an escrow account is put in place for a loan:

  • Sticker shock prevention. Property taxes are collected by most counties twice per year. With an escrow account, the lender collects a prorated amount toward the annual tax and insurance bills every month, preventing borrowers from getting socked with a big lump sum tax bill that is harder to pay.
  • Convenience. Homeowners who have their taxes, insurance and even HOA dues collected via escrow account make a single payment monthly that covers all these bills, rather than having to write multiple checks on different schedules to the mortgage company, tax assessor, insurance company and HOA. This minimizes the discipline and organization required to pay all these items consistently on time.
  • Lost interest. Most escrow accounts do not bear  interest,  though some states do require escrow accounts to pay at least a small interest rate. Some consumer advocates bemoan the loss of potential interest homeowners could be earning on their tax and insurance monies. Owners with sufficient equity in their homes to opt out of having an escrow account can replicate the convenience of an impound account, without the disadvantage of lost interest, by having the monthly allotment of tax and insurance funds automatically directed to an interest-bearing savings account until it is time for the bi-annual tax and insurance payments.
  • Fluctuations in  monthly  payment. Usually, lenders adjust escrow accounts and, thus, their borrowers’ escrow payments, on an annual basis. Property taxes,  assessments  and insurance premiums change annually, so escrow accounts need to be tweaked to match. As such, even if you have a 30-year fixed rate mortgage, with an impound account, your monthly mortgage payment may change from year to year. (Realistically, though, without an escrow account, the non-mortgage costs of ownership will still fluctuate -- they just would not impact the actual mortgage payment.)

Once upon a time, escrow accounts were optional for almost all borrowers. These days, lenders require escrow accounts on all loans with less than 20 percent down. Without an escrow account, the borrower must exercise disciplined savings practices, or face the consequences when the big tax bill comes due. If you do not have an escrow account, but you want one, most lenders are happy to put one in place for you. However, once you have an escrow account and decide you no longer want it, it can be tough to get rid of it.

NOTE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Next Up

Did I Accept a Bad Offer on My Home?

Worried you accepted a bad offer for your home? Let real estate expert soothe your fears.

Moving Day Tips: How to Pack for a Move

These 10 packing tips will help you move more efficiently and smoothly.

Pros + Cons of Rent-to-Own Agreements for Buyers and Sellers

For both the seller and homebuyer, renting to own a house can be a dream come true — or a nightmare. Find out if this type of real estate transaction is right for you.

The Skinny on the Short Sale

How to get a short sale when you're facing foreclosure on a house.

What Foreclosure Means and How to Stop It From Happening

Learn about the various steps in the foreclosure process and ways you can avoid losing your home.

Short Sale Rules: What You Need to Know

A short sale occurs when a property is sold for less than what is owed on the mortgage with the lender's approval. Learn the advantages and disadvantages of this type of transaction for the seller and the buyer.

Sellers: What to Do When You Can't Find a Home Before Yours Sells

If you sold your house before you've found new digs, don't worry: You have options.

How to Quickly Sell Your Home When Threatened With Foreclosure

Get tips and advice on how to sell your home fast.

Advantages and Disadvantages of Buying a Home in Foreclosure

Purchasing a foreclosed home can mean getting a bargain, but there are potential pitfalls too.

How to Deal With Your Lender When Facing Foreclosure

In the foreclosure world, "workout" has nothing to do with the elliptical trainer. It's about cutting a deal with your lender to stop the foreclosure process.

Go Shopping

Refresh your home with stylish products handpicked by HGTV editors.


Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.