Pros and Cons of Mortgage Escrow Accounts

by Ryan Guina

Mortgage escrow accounts are a fact of life for most people with a mortgage. In most cases, your escrow account runs in the background and you probably don’t think about it unless something goes wrong. You just make your monthly mortgage payment and a portion of it goes to the lender, and the other portion goes to the escrow service, which holds the money you send them in an account which is then used to pay your property taxes and homeowner’s insurance when they are due.

Most people with an escrow account have it because it was required by their lender when they purchased their home. (Most lenders require escrow accounts for first time homebuyers or when you don’t put down much when you make the purchase.) The escrow account helps lenders protect their investment and makes it easier for many homeowners to budget for their property taxes and homeowners insurance because they make the payments on a prorated basis – you can think of it as a forced savings account.

While escrow accounts may be required and offer a simpler way of doing things, there are both advantages and disadvantages to using escrow accounts.

Benefits of mortgage escrow accounts

The main benefit of using an escrow account is not having to come up with a large payment every 6 months or so for your property taxes or annually for your homeowners insurance. When everything works as advertised, you will have contributed an equal portion of these bills in the months leading up to their due date. In this sense, the escrow account works as an accrual account.

The other benefit for the homeowner is not having to worry about sending in these payments when they are due, because the escrow company should take care of them for you – trust me, you don’t want to miss out on your tax payments!

Unfortunately, sometimes things go wrong, which is one of the major disadvantages of escrow accounts.

Downfalls of mortgage escrow accounts

There are several downfalls to escrow accounts. Basically, you are paying someone to do something you could do yourself (make payments on a schedule). Other downfalls occur when escrow accounts don’t work properly, when there is an overage or shortage, and due to missed opportunity cost.

When escrow doesn’t work

The biggest downfall of an escrow account is when things get mucked up, regardless of who is at fault. Many mortgages are bought and sold, which sometimes causes a change in the escrow company. Sometimes things get messed up in the transition. Other problems can occur if your escrow company misses a scheduled payment, or if your escrow company goes broke. Your escrow company may be FDIC insured, but it still may take some time to get your funds, which may delay your property tax or insurance payments.

Escrow shortfalls and overages

Another downside to escrow accounts is that they are set for your last property tax rate or homeowners insurance rate. If property tax values change, you may find yourself with an overage or a shortfall (either too much or too little money in escrow). An overage is no big deal, you simply paid too much and missed out on a little bit of interest that you could have used if you had your money stashed in a savings account.

An escrow shortfall, on the other hand, can be a big deal. This happens when you don’t have enough money in your escrow account and your tax or insurance bill causes your escrow account to run low. Your escrow account may cover the shortfall (you are usually required to have a buffer in your account), but you will need to replace your buffer and pay more on your mortgage payments in the months that follow to both replace the buffer that was depleted and to make up for the higher tax or insurance rates you are paying.

Escrow shortfalls and overages are one of the most common reasons your mortgage payment can change even with a fixed rate loan. This happened to my wife and I twice in the first two years we were married, one time $150 per month, the other time about $10 per month. Thankfully, both of these were reductions in our mortgage payments!

*One a side note, the recent housing slump has caused home prices to drop in many areas, which  may make it a good time to challenge your property taxes. This was how we had a drop in our mortgage payments.

Missed opportunity cost

The final downfall to using a mortgage escrow account is that the average homeowner usually has several thousand dollars tied up in escrow at any given time, money which could be earning you interest instead of someone else.

Should you use an escrow account?

Looking through this list, it seems as though the cons outweigh the benefits, and as I mentioned earlier, you are basically paying someone to do something you can do yourself. So why even bother with an escrow account?

The answer for many people is easy: it is required by the lender. Some lenders won’t even give you an option of doing away with your escrow account unless you an prove you have a certain amount of funds on hand or you own a certain percentage of your property.

There are other reasons to use an escrow account, which mostly boil down to convenience. It is easy to set up automatic payments to your escrow account, so you can send in a monthly payment toward your property taxes. They also send in the check, removing the responsibility from you.

In fact, I even know people who own their house and continue to use an escrow account because they can set it on autopilot and don’t have to worry about making payments when they are due. Owning their home reduces the risk of their escrow company changing, and thus reduces their worry. It’s a small price to pay for peace of mind.

What are your thoughts on mortgage escrow accounts? Good, bad?

Published or updated December 20, 2009.
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{ 13 comments… read them below or add one }


My wife has an accounting degree, and we still let the escrow company handle our taxes and insurance payments.

In February, we’ll have our house paid off, so I think we’ll start to handle that functionality. If I’m lucky, maybe I’ll make a few bucks in interest. 🙂

I’m unfortunate in that the county I live in, messed up the assessment of my house. With my county auditors online website, I did a property search. Apparently, I have an extra 200 square feet that I’m not aware of… not! 🙁 They extended my house living area into my garage. So now I have to fight with them (hopefully fight is too strong of a word), to get this straightened out.

If anyone has a similar problem, get the process flowing at the beginning of the year. Why I say this is because often time they only evaluate property reassessments at the beginning of the year (I believe I have until March to do so). This policy is region specific, so it might not apply to you, but it never hurts to check…


2 Ryan

Don, My wife and I had a similar issue – they had our house as having an extra bedroom. Our county allows one challenge per year outside of the normal reassessment period (I believe they reassess valuations every 3 years). We were able to get the issue changed and we saved a few hundred dollars per year in the process. It was well worth it!


3 PDubbs

Ugh, I had the problem of a shortfall this year.
I changed our homeowners insurance policy to combine our car policies and get a multi-policy discount. So our old insurance company sent us the check (escrow had already paid them) and then our mortgage (same as escrow) company paid the new insurance company, didn’t tell us or anything. So then we have a check and deposit into our account and don’t think anything of it. Then a few months later, we get a notice saying we’ll have an anticipated shortfall in the escrow account and our monthly payment is going up $100/month. Not a huge deal for us financially, but it was a major headache getting it sorted out.

Wouldn’t do the escrow except as you noted, it is required for us (low down payment, PMI, etc).


4 PennyStocks

The variablility sounds like a nightmare. I’m currently locked at 4.875 not expecting it any lower and a rise in escrow would break me.


5 Evan

I was Forced into my Escrow account and I LOVE IT!

I live in one of the most expensive places in the Country in terms of property taxes (Long Island, New York) and to not have to worry about coming up with the property taxes because I was forced to budget over 12 months is one less headache


6 EvilV

I hate my escrow account. I’ve lived in my house 2 years, and they have never once paid anything on time. Fortunately they are the ones at fault for picking up the late fees on my taxes. Although it is a bit disconcerting to have my insurance policy lapsing for a week or two every year.


7 Tony Joseph

What gonna happen to my postive escrow funds since my loan has been charged off to FACS (unsecured loans)? Am i eligible to receive the postive balance from the escrow. Kindly mail me if anyone has an answer to this issue. 🙂


8 Ryan

Tony, I don’t have an answer for you; I recommend contacting your escrow company for more information. Best of luck!


9 Tony Joseph

Thank you Ryan……


10 Pat

I have an escrow shortage and the lender will not allow me to pay the shortage. They said their system would not allow it. They have increased my monthly payment. Is this legal? I thought you would pay the shortage.


11 Daniel

We were First time home buyers. There for we had to get an escrow account. a year after owning our house we received a letter.”your paying to much . we lowered you payment!” it was around 75.00 a month less. The next year ” oh we messed up you should have been paying more.” then it went up about 175.00 more than originally. we struggled with multiple jobs and made those payments. Then the next year came . Another “mess up” as the customer service rep stated. for instance jumped 750.00 to 1,200.00 a month. I LOST MY HOUSE ! How can this be legal They are supposed to know what they are doing. now 2 years past my deed in lieu . After my 4 bedroom 2 bath with 5 family members we are renting a 2 bed 1 bath. Can anyone explain this better for me. Thanks and BE CAREFUL


12 Tu

I am currently refinancing my house and have opted to setup a mortgage escrow.
Can you opt out of the escrow down the road?



13 Ruby

I was approved for Disability tax exemption for 2012, which also qualified me for a refund from the year 2011 in the amount of $508.00. All principal payees mailed the refund check to my address because of my name on the tax roll. The mortagage company was mailed the refund check from Harric County tax office. My mortgage company refuse to give me access to these fund. They first stated that have the right to place these funds in escrow. The explanation on my payment summary first stated [real estate tax paid] and later listed as real estate tax credit. Do they have the right to take these funds in which is needed because of my disabilities and lack of funds. I am in need of new garage door which cost over $600.00.


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