Mortgage Escrow
Escrow is basically where a middleman comes between the buyer [in this case you, the homeowner], and the seller [in this case a bank]. Escrow is mandatory in many mortgages.
When you pay your mortgage, a lot of the money does not go directly to the principal of the mortgage. Some goes to interest [Especially if you are in the beginning stages of your mortgage], some goes to insurance, and some goes to Escrow. The money in Escrow is held aside so it can be used to cover property taxes and other small payments that go along with having a mortgage.
Escrow is a great thing if you are a procrastinator or if you are a little “slack” financially. You will not have to come up with large lump sum payments for property taxes or other nuisances. A mortgage escrow is basically like a safety net for homeowners.
The biggest disadvantage to mortgage escrow’s is that you are handing over your money and you are not getting any interest in return, or nominal interest at best. Over a year the stock market should return around 8-10%, cd’s between 3-5%, and real estate between 5-7% on your money. By putting your money in an escrow account you are getting between 0-0.5% which will do hardly anything to grow your money. Compound interest is one of the most powerful things in the world and you are consciously ignoring it every time you are forced to put money into a mortgage escrow account.
Many times putting money towards a mortgage escrow account is not negotiable, you simply have no choice in the matter. If this is the case do not worry about it, your money is being put to good use. If you do have a say in the matter consider other options. You can always put the same amount of money into a high yielding bank account and get a higher return on your money. This would be a great option if you are disciplined financially.