What Should I Pay First: Mortgage or Escrow? (2024)

FAQs

What Should I Pay First: Mortgage or Escrow? ›

If you're stuck between paying down the balance on the principal or escrow on your mortgage, always go with the principal first.

Which Is More Important? Both the principal and your escrow account are important. It's a good idea to pay money into your escrow account each month, but if you want to pay down your mortgage, you will need to pay extra money on your principal. The more you pay on the principal, the faster your loan will be paid off.

A decrease in your monthly escrow amount would end up decreasing your total monthly mortgage payment.

All lenders require that mortgage payments be kept current when a property is in escrow. When making payments during the escrow period, it is recommended that it be made by cashier's check in order to have proof of payment.

But paying the shortage in full won't save you any money because interest isn't charged on a shortage amount. And it might not always be possible to pay the full shortage in one lump sum. It can be a significant financial burden—especially if the shortage is large.

The answer likely lies in your annual escrow analysis. Once a year, your lender reviews your escrow account to ensure that there's enough money to cover your taxes and insurance premiums. If this number changes, so will the amount you're required to pay.

But as we said, when you have to choose between paying the principal or escrow on your mortgage, always go Principal! First and foremost, you can shorten the length of your mortgage term. This process can be expedited even further by making extra payments or going above the minimum required payment.

Escrow payments usually go up due to increasing insurance costs or taxes. If you opt to add an escrow account later in your mortgage term, it may involve additional fees to set up and manage the account. Fortunately, the cost to set up and manage the account shouldn't exceed one-sixth of your annual escrow payments.

If you can't afford to put 20% down when you take out the loan and don't want an escrow account, you might be able to cancel the account once you reach 20% equity in the home. In most cases, you also must have had the loan for at least a year and can't have any late payments during that time.

Who owns the money in an escrow account? The buyer in a transaction owns the money held in escrow. This is because the escrow agent only has the money in trust. The ownership of the money is transferred to the seller once the transaction's obligations are met.

Do you get escrow money back? ›

If your escrow account ever discovers that they are holding more money in the account than what is required, they are legally obligated to send you a refund check for the overage within 30 days. This could happen if your property taxes go down or you switch to a less expensive homeowners insurance policy.

Homebuyers: What happens the week before closing

“My assistant checks in with the lender and title company prior to closing,” Heuser explains. “We have a checklist that we go through as we get within a week just to make sure that the lender has everything that they need on their end in order to fund the deal.

Escrow accounts can provide peace of mind and convenience as they reduce the burden of having to pay your homeowners insurance premiums and property taxes yourself. Another benefit is that you can still shop around with different insurers whenever you like and save money by changing your policy.

In most real estate transactions, the standard duration for how long can escrow hold funds is 30 to 60 days. This period allows ample time for both parties to fulfill their obligations, including inspections, appraisals, and financing approvals.

While escrow does provide a lot of benefits, there are some downsides. Loss of investment opportunities: In addition to your mortgage, you're also paying a chunk of your property tax bill and insurance premiums into the account — money that can't be earning a higher return elsewhere.

Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.

Typically, if you have a mortgage, your lender will require you to have home insurance — and they'll also require you to use an escrow account to pay for it. This is because it's a way for them to guarantee that you can make your payments.

Do Large Principal-Only Payments Reduce Monthly Payments? No matter how many principal-only payments you make on a fixed-rate mortgage, your monthly payment stays the same unless you recast your mortgage. You'll end up making fewer total payments and paying off your mortgage faster.

After a year of mortgage payments, 31% of your money starts to go toward the principal. You see 45% going toward principal after ten years and 67% going toward principal after year 20.