If you plan to finance your new home purchase, your lender may require you to establish an escrow account, or it may set one up for you. If you are paying cash for your home, or if your lender does not have a similar requirement in place, it may still be in your best interest to set up an account. Ann Irons, a CPA who provides escrow accounting in Bellingham, MA, helps you decide whether to open an escrow account.

What is an escrow account?

An escrow account serves as a sort of repository into which you deposit money earmarked for mortgage-related expenses, such as real estate taxes and homeowner’s insurance premiums. This is standard practice, especially on Federal Housing Administration mortgages. In other cases, you may be given the choice between paying insurance premiums and real estate taxes out of your own pocket. To qualify for this, you may be required to front a minimum of 20% of the home purchase price. Escrow payments are billed monthly.

Questions to Consider

Before you make your decision, ask yourself:

Am I responsible enough to save my money? If you often find yourself coming up short when bills or due, or if you have a hard time making it from one paycheck to the next, an escrow account is a good idea. Otherwise, you’re more likely to incur heavy fees for late or missed payments. It’s surprisingly easy to let the deadline slip past you, something that can’t be said of a financial institution. Ann points out that people who mismanage their payments are more likely to turn to credit card debt to fund their lifestyles—bad idea.

Is my income consistent from one month to the next? If you own your own business, are paid on commission, or are a contractor, your monthly income may vary. This gives you a higher degree of flexibility to make your tax and insurance payments directly. In months where you generate a higher than average income, you can set extra aside for your future payments. This is not as easy to do if you make the same amount every month.

How might this money be used more effectively? If you’re fully confident in your ability to manage your expenses, it doesn’t make as much sense to give your money to a bank or other financial institution, says Ann. Alternately, you might consider setting up a money market or savings account, or certificates of deposit.

More Escrow Tips

In some cases, banks will offer you a more favorable interest rate on loans if you agree beforehand to let them handle your escrow account. This could save you thousands in the long run. This is especially important at closing time. It’s possible that the closing costs, taxes, and insurance bills combined could but a serious strain on your finances.

Many of our clients prefer escrow accounts because they appreciate that it is the lender’s responsibility—not theirs—to ensure payments are made in timely manner. This means you will not incur any fines or penalties if your lender makes a delayed payment on your behalf.

Planning to buy a new home in Bellingham, MA? To learn more about escrow accounts and securing loans, or to schedule a meeting with Ann Irons, CPA, LLC, contact us at (508) 966-0700. We offer tax planning, tax filing, and accounting services for individuals, investors, and businesses in and around Bellingham, Medway, Milford, Worcester, Woonsocket, and the surrounding areas.