You might find yourself with an Escrow (or “impound”) account for a number of different reasons but ordinarily it’s because you’ve taken out a mortgage and your lender insists on you having one – particularly if you’re a first time buyer and/or can only put down a minimal deposit. Whatever the reason it’s ultimately there to help protect your investment but, as with any product, there are always pro’s and con’s. Here we take a look at some of the main points to bear in mind:
Key advantages of escrow accounts
- They can help protect your investment and budget with very limited (if any) effort required on your part. It’s almost like an enforced savings account that simply runs along in the background without you having to manage it on a day-to-day basis.
- Escrow accounts mean you don’t have to worry about large payments as and when they become due e.g. for property taxes or insurance – essentially, then, they also act as an accrual account.
- If you have difficulty saving, escrow accounts work well since you can’t withdraw from them – see the above point about having an ‘enforced’ savings account! You can never be tempted to spend the money on something else such as home improvements or an expensive holiday!
Key disadvantages of escrow accounts
- Escrow accounts mean you’re entirely dependent on paying someone else to do something you “could” strictly do yourself – hence you may feel as though you’ve lost control of your finances, particularly if your escrow company is changed by a management buy-out or worse still, your escrow company gets into financial difficulty. For this reason it’s also important to make sure your nominated company are fully insured in the unlikely event that this happens.
- Always remember that if rates change you may find yourself either over or under paying. If the latter – and whilst it may well be the fault of the escrow company – you still remain ultimately responsible for the difference.
- Another key disadvantage to an escrow is having your money tied up when it could be earning interest in a savings account.
If you find yourself in the fortunate position of being able to choose whether or not you enter into an Escrow (or impound account) then these are certainly some of the key considerations to take into account and ask your lender. It’s also worth mentioning that, once entered into, opting out of an Escrow can be fairly difficult so be sure you know where you stand and take professional advice before you enter into any legal contract