As retirement nears, it’s exciting to think of the next chapter of life and what it will look like. For many Lockheed Martin employees, retirement means moving, either back home or to that place where you’ve always dreamed of living. With moving, comes buying a new home. Buying a new home comes with decisions such as “to escrow or not to escrow.” That is the question we’ll answer today.
Before we dive into the pros and cons of using an escrow account, let’s define what an escrow account is. Investopedia defines an escrow as follows: Escrow is a legal concept describing a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction. In other words, money is held by a third party until it is transferred from one party to another. In real estate, the escrow is, most commonly, the money held by the mortgage lender which is then paid to the tax assessor and the insurance company.
Like any transaction, there are pros and cons to using an escrow account for your mortgage. Let’s take a look at those now:
| Pros | Cons |
| It’s automatic! Bills are paid on time, so you avoid penalties such as late fees or potential liens against your home. | Higher closing costs. You may be required to deposit several months’ worth of taxes and insurance premiums, often called “prepaids,” which can significantly add to your mortgage closing costs. |
| Shortfalls covered! The lender covers increases in taxes or insurance for you and will adjust your payment to cover the new amount and the shortfall they paid on your behalf. | Higher mortgage payments. Your monthly payment will now include principal, interest, taxes, and insurance. |
| Potentially lower costs! You may be able to get a discount on your interest rate or closing costs just by having an escrow account | Incorrect estimates. Your mortgage payments will fluctuate as the lender tries to assess the correct amount to cover the taxes and insurance; however, their estimates can be too low, which then can lead to you writing out a separate check or having your payments increase. |
| Budgeted payments! You can spread the larger lump sum bills out over 12 months. | Loss of interest. Escrow accounts typically do not generate interest. If you’re a good saver, then the money could be in a different account growing instead. |
| Less stress! You don’t have to remember to make the payments on your own or be fearful of accidentally spending what you saved on something else. | Liability. You are responsible for making tax and insurance payments on time and if they are missed, then you’ll be subject to penalties such as late fees or potential liens against your home. |
Whether to use escrow or not will depend on your particular situation and your own personality. Here are some questions to ask yourself:
- Am I a good saver?
- Where else could I put my cash?
- Will it make a difference to the lender?
- Do I want the responsibility?
We encourage you to look at your overall financial plan and have a discussion with your financial planner/advisor before making this decision. If you don’t have an advisor or would like a second option, we’d be happy to sit down with you. Give us a call today at 817-210-3444 or click HERE to book a complimentary consultation with one of our Lockheed Martin specialists who can review your situation and help you continue to plan for retirement.
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