Escrow Impounds (aka Reserves) is the industry term for having the lender collect and house the money to pay your property taxes and homeowner’s insurance when due. The Escrow Impounds account is set up when you start your loan with a certain number of months of taxes and insurance to assure the first payments of each can be made when they are due within the first year. Beyond that, every month your payment will include 1/12 of your annual homeowner’s insurance and 1/12 of your property taxes.
On the anniversary of your home purchase, the lender will pay the annual homeowner’s insurance premium directly to your insurance agency. Property taxes [in WA State] are due on a semi-annual basis in April and October. The lender will make disbursements to the County to cover your property taxes twice a year in April and October.
Typically, if you have 20% or more down when you purchase or 20% or more equity when you refinance, you have the choice of having the lender collect and pay the taxes and insurance OR you can save and pay on your own.
PROS & CONS
The PROs to not having an Escrow Impound arrangement with the lender is that you maintain control of your own money. You can keep it in an investment to earn interest. Your mortgage payment is principal and interest on the loan – nothing more. Assuming a fixed rate loan, your payment will never rise.
The CONs to the above are that you have to make sure you are always saving to make the disbursements when they are due. You are fully responsible. If they are not paid on time, the lender can demand you set up an Escrow Impound account and potentially force-place homeowner’s insurance on your property that they will bill you for. As taxes and insurance rates rise, you will be notified by the County and your Insurance Agent and pay accordingly.
The PROs to having an Escrow Impound arrangement are that you make one payment every month and the lender takes care of everything from there. Less to manage and less to think about.
The CONs to the above are that you have to be prepared that your payment will likely go up as the County raises property taxes and your Insurance company raises your premium. The lender will send an annual statement of the status. Whenever a shortage exists, you will have the choice to make this up by sending in funds or they can add it to your payment.
THE SHORT OF IT
Some people prefer to keep their own money and pay on their own. Others like the convenience of having the lender handle it. If you have the equity, the choice is yours. We [at Arboretum] do have lending options for people with less than 20% equity to Opt Out if they so choose. This saves money at the closing table and allows people to Opt In at a later date. Consider what is best for your style and needs. And, by all means, have a conversation with Amy to talk it through.