There are times when an escrow account is not beneficial to the borrower. When you set up an escrow account, you are asking the escrow company to play the middle man between you and the lender, property insurance company, county taxes and private mortgage insurance company regarding your payment to them.

You pay the escrow company, who in turn divides it accordingly, then passes it on to all the collectors involved. When discussing a monthly mortgage payment, have you ever heard the terms PI/TI, PI/TI/MI or just PI? These letters, when written after a payment amount, are referring to what is included in that payment. They are defined as the following:

PI: principal and interest payments
TI: property taxes and insurance payments
MI: private mortgage insurance payments

Escrow Accounts combine a number of monthly payments into one bill, easing the burden of the borrower's monthly bill-paying chores. It also helps the borrower to budget. If the borrower has his property taxes and home insurance fees escrowed, he no longer has to rely on his own self-discipline to save up each month so that he will have enough funds when it comes time to pay the annual fees. The funds for these bills are saved through the required escrow payments.

The advantages to escrow accounts:

Requiring a borrower to escrow his property tax payment provides security for the lender from liens that can be placed on the property if the borrower fails to pay these taxes. These tax liens are given priority over any other liens, regardless of the order in which they were placed on the property. This means if the lender had to foreclose on the property, he would then be responsible for payment of the tax liens. Likewise, escrowing home insurance payments protects the lender from liability costs not covered under a policy because it has lapsed from lack of payment. We strongly recommend that any seller considering seller finance request that his buyer escrow the property taxes and insurance.

The disadvantages to escrow accounts:

There are times when an escrow account is not beneficial to the borrower. If the borrower has a large property in which the annual property tax and insurance payment is significant and he also has a large degree of self-discipline, he can opt to make the payments himself annually and earn interest on the funds up until the time they're due. This is also a great way for a property manager with a large clientele to earn an extra income.