Should You Pay Extra Into Your Escrow Account?
Decide if adding extra funds to your mortgage escrow account aligns with your financial goals. Understand the practical implications.
A mortgage escrow account is a fund managed by your mortgage lender to cover property-related expenses like taxes and homeowner’s insurance. This arrangement ensures these bills are paid on time, protecting both the homeowner and the lender. This article explores whether voluntarily contributing additional funds to this account is a sound financial decision.
Components of Your Escrow Account
Your monthly mortgage payment typically includes an escrow portion, in addition to principal and interest. This amount covers recurring property expenses, primarily property taxes and homeowner’s insurance premiums. Lenders collect a portion of these anticipated annual costs each month.
Lenders estimate the total annual amount for these expenses and divide it by twelve for the monthly escrow contribution. This monthly sum is added to your principal and interest payment, forming your total monthly mortgage payment, often referred to as PITI (Principal, Interest, Taxes, Insurance). If your down payment was less than 20%, your escrow account might also include private mortgage insurance (PMI). Lenders usually require a cushion, often two months of payments, to protect against unexpected increases in these costs.
Reasons to Add Funds to Escrow
Homeowners might add extra funds to their escrow account for several reasons, primarily to manage unexpected cost increases. One common scenario involves addressing a projected escrow shortage. This shortage can occur if property taxes or homeowner’s insurance premiums increase more than initially estimated. An annual escrow analysis will identify such discrepancies and lead to an increase in your regular monthly escrow payment to cover the shortfall.
Voluntarily adding funds can help mitigate this increase or cover the shortage in a single payment. Another motivation for contributing extra is to build a buffer within the account. This cushion can help absorb future increases in taxes or insurance without immediately impacting your monthly mortgage payment. Maintaining an elevated balance can provide peace of mind by reducing the likelihood of a sudden jump in housing expenses.
Financial Implications of Extra Escrow Payments
When you contribute additional funds, this money sits in your escrow account, held by your mortgage servicer. These funds do not reduce the principal balance of your mortgage loan. Consequently, paying extra into escrow will not decrease the interest you pay over the life of your loan, nor will it shorten your loan term.
A significant financial consideration is the opportunity cost of tying up funds in escrow. Money held in an escrow account typically does not earn interest. Instead of holding excess funds in escrow, you could use that capital for other financial objectives. This might include paying down high-interest debt, such as credit card balances, where interest savings could be substantial.
Alternatively, these funds could be invested in a savings account or other investment vehicles, potentially generating returns. Building an emergency fund with accessible cash for unforeseen expenses is another beneficial use. While a larger escrow balance might result in a larger refund during the annual escrow analysis, the money remains inaccessible and non-interest-bearing until that time.
Steps for Making Additional Escrow Payments
If you decide to make an additional payment to your escrow account, contact your mortgage servicer. This is the company that handles your mortgage payments. You can find their contact information on your monthly mortgage statement or through their online portal.
When you contact them, inquire about their procedures for making supplemental escrow payments. Common methods include making a payment through their online platform, initiating a phone payment, or mailing a check to their designated payment address. After making the payment, confirm its receipt and how it will be reflected on your next escrow account statement. This ensures the funds have been properly allocated and your account balance is updated.