Why You Should Not Escrow Your Taxes and Insurance

When refinancing or purchasing a home, one of the choices you may overlook is whether to escrow your property taxes and homeowners’ insurance into your mortgage payment. If given the option, opting out can be a smart financial move.

What Is an Escrow Account?

Your mortgage payment typically consists of principal and interest, but lenders often offer to include property taxes and insurance as well. This means you pay a little extra each month, and the lender holds that money in an escrow account to pay these bills on your behalf. While this may sound convenient, lenders primarily do this to protect themselves—not you.

Why Lenders Push for Escrow Accounts

1. Protecting Their Interests – If you fail to pay your property taxes, the city places a lien on your home. This lien takes priority over the lender’s claim, meaning that if the property is sold in foreclosure, the lender might not get repaid. By escrowing your taxes, the lender ensures they remain protected.
2. Earning from Your Money – While the bank may not pay you interest on the money held in escrow, they can use it to increase their lending power. By holding excess funds from thousands of homeowners, lenders generate more revenue without offering you any return on your money.

The True Cost of Escrowing in Los Angeles

Los Angeles County has high property taxes, and many homeowners pay $15,000-$20,000 annually. Instead of letting that money sit in a non-interest-bearing escrow account, why not put it in a high-yield savings or investment account and earn a return?

How to Opt Out of Escrowing

Some lenders require escrow accounts, especially if you make a small down payment, but many allow you to waive it. If you have the choice, consider opting out and managing your tax and insurance payments yourself. Here’s why:

• You maintain control over your funds – Rather than letting your lender hold onto your money, you can save or invest it until the bill is due.
• Avoid excessive padding – Lenders estimate your taxes and insurance and then add a cushion (often 1/6 more than required). That’s money sitting idle instead of working for you.

If you currently have an escrow account but want to opt out, you may need to send a formal request. Some lenders make this process easy, while others may be resistant.

The Convenience Argument

Yes, escrow accounts simplify budgeting since your taxes and insurance are included in your mortgage payment. However, if you have financial discipline, setting aside this money yourself allows for better cash flow management. Plus, lenders don’t always get the amounts right, and they may hold more of your money than necessary.

Take Control of Your Finances

Escrowing might be the right choice for some homeowners, but if you’re looking to maximize the value of every dollar, handling these payments independently is often the smarter choice. Don’t let the bank decide how your money is used—keep control, earn interest, and optimize your financial strategy.

Have mortgage questions? Let Los Angeles Mortgage Lender help you make the best financial choices. Call us today at 213-510-1717 or visit our GBP listing here: https://bit.ly/losangelesgbp.