How to Manage an Escrow

by D. Laverne O'Neal

When you take out a loan to purchase a home, your lender typically deposits a portion of your monthly payment into a mortgage escrow account. From the escrow, the lender pays insurance and property taxes. In some cases, if you finance no more than 80 percent of the purchase price, you may have the option of managing your own escrow. Managing an escrow account requires discipline and attention to detail, because the penalties for missing insurance and property tax payments can be stiff.

Turn Down the Lender's Escrow Service

An escrow account is a trust account held in the name of the borrower to pay obligations such as property taxes and insurance premiums. If you choose to manage your own escrow, you'll be setting up your own account instead. Some lenders may require you to pay a fee to manage your own escrow; for example, 0.25 percent of your loan amount. Though paying a fee might seem undesirable, it might be worth it to you in the long run. If you manage your own escrow, you can, for one thing, avoid payment errors. Many are the tales of banks that have failed to pay property taxes timely -- or at all. Late payment fees can really add up and damage your reputation with the insurance company and/or the tax authority. Managing your escrow puts you in the driver's seat, allowing you to cover your own obligations.

Open an Account for the Escrow Monies

A savings account can be useful if you would like to earn interest on the money. One argument in favor of managing your own escrow is that you can get interest on the funds that would otherwise be sitting in the lender's escrow account. Do your best to find an account with the highest possible interest rate. A high interest rate may even end up partially offsetting any fees lender might charge you for managing your own escrow. On the other hand, if earning interest is not a priority for you, any bank account will do.

Add Together Your Yearly Tax and Insurance Amounts

This is the amount you should deposit in your escrow account initially. It is a good idea to deposit more money into the escrow you are managing in case your tax or insurance rates go up unexpectedly. For example, your property may be reassessed at a higher value, or your insurance company may announce a rate increase. Keeping a surplus in your escrow account can protect you in such situations. Your objective is to always be in a position to pay insurance and taxes timely and in full.

Calendar Your Tax and Insurance Payments

Missing a payment can result in late fees or other charges. Keeping a calendar of payment deadlines will help keep you on track. If keeping up with dates is difficult for you, employ all the tools at your disposal. For example, use calendaring software on your desktop or laptop computer. You may even have a calendar app on your handheld device that includes an alarm feature. Otherwise, posting notes at your desk or even on the refrigerator door can be helpful. A reliable spouse or partner may also be a good resource. The important thing is not to miss a single deadline.

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

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