Should You Keep or Cancel Your Escrow Account? A Homeowner’s Guide
If you're a homeowner with a mortgage, chances are you’re already using an escrow account—even if you’re not entirely sure how it works. In fact, roughly 80% of mortgage holders in the U.S. have one. In this post, we’ll break down what escrow accounts are, how they work, and whether removing yours could benefit you.
What Is an Escrow Account?
An escrow account is a separate account set up by your mortgage lender to manage key property-related expenses, such as:
Property taxes
Homeowners insurance
Each month, a portion of your mortgage payment is set aside in this account. When your taxes or insurance premiums come due, your lender pays them on your behalf using the funds in escrow.
This arrangement ensures these expenses are paid on time, protecting you from penalties or fees from late payments. Your lender reviews the account annually—typically through a process called an escrow analysis—to make adjustments based on actual or projected changes in costs. If there’s a shortfall, you may be asked to pay the difference or accept a higher monthly payment. If there’s a surplus, it might be refunded or applied to future payments.
Can You Remove Your Escrow Account?
Yes—under certain conditions. Some lenders allow homeowners to remove the escrow requirement if they meet specific criteria. These commonly include:
A loan-to-value (LTV) ratio of 80% or lower (e.g., owing $320,000 or less on a $400,000 home)
A positive balance in your current escrow account
No late mortgage payments in the past 6-12 months
Proof of an active homeowners insurance policy
Policies and procedures vary by lender, so be sure to check your mortgage agreement or reach out directly to your servicer for details.
Advantages of Removing Your Escrow Account
1. Lower Monthly Mortgage Payment
Removing your escrow account means your mortgage payment will only include principal and interest. Here's a simplified comparison:
| Component | With Escrow | Without Escrow |
|---|---|---|
| Principal + Interest | $1,300 | $1,300 |
| Real Estate Taxes | $550 | — |
| Homeowners Insurance | $150 | — |
| Total | $2,000 | $1,300 |
2. Earn Interest on Your Own Funds
Instead of letting your lender hold the money interest-free, you could deposit those funds in a high-yield savings account. At 3.6% annual percentage, contributing $700 per month for six months would earn you about $43.60 in interest—modest, but better than zero.
Cons of Removing Your Escrow Account
1. Risk of Missing Due Dates
Without an escrow account, you are now responsible for paying your property taxes and insurance premiums on time. Missed payments can result in costly penalties—or worse, a lapse in coverage.
2. Budgeting Becomes More Challenging
Large, infrequent bills can be harder to manage compared to setting aside money monthly. An escrow account essentially forces you to save consistently. Without it, you risk spending funds meant for your taxes and insurance.
Final Thoughts
For many, escrow accounts offer convenience, peace of mind, and financial discipline. But if you’re confident in your budgeting skills and want more control over your money, removing your escrow account could be a smart financial move. Just be sure to weigh the pros and cons carefully.
Still unsure? A financial planner can work with you to assess whether keeping or removing your escrow account is best for your financial situation.
Please email me at matthew@payitforwardfp.com if you would like to discuss your escrow account, and how it affects your monthly cash flow.