When is a good time to refinance, cut out the escrow company and manage my home loan payments?

Q: We have a home with a $300,000 loan balance at 3.875%. Because it’s VA, we have to go through an escrow company for taxes and insurance. Our payment amount includes extra for a reserve. My question is: When does it make sense to refinance so I can eliminate escrow and control my own payments?

A: A monthly mortgage payment generally consists of two parts. First, there are the principal and interest payments related to the loan. Then, there can be additional costs for the escrow account — sometimes called an “impound” account — for such things as property taxes and homeowners insurance.

If you have a fixedrate mortgage you know the monthly cost for principal and interest. They are fixed for the life of the loan. Escrow charges can vary. Property taxes, for example, can go up. The same with insurance and other expenses.

The amount that can be collected in escrow charges is limited. In basic terms, the maximum amount that an escrow account can hold is equal to 12 months of payments, a twomonth cushion and not more than $50. You must receive an annual statement showing escrow activity. If more than $50 in excess funds are in the account the extra money must be returned to you.

If you want to avoid an escrow account you will need at least 20 percent equity when you buy or refinance. With 20 percent equity lenders will not require the use of an escrow account, though many borrowers want one. You are directly responsible for making tax and insurance payments if the lender does not maintain an escrow account.

The bottom line is this: Whether the money is put in an escrow account or you collect it yourself, there are required payments associated with homeownership. If those payments are late or not made there can be serious consequences. An escrow account is very simply an enforced type of savings. It assures required payments can be made. While one can argue that making payments yourself and collecting interest is beneficial, the reality is that interest rates today are so low that it’s hardly worth the effort. If the idea is to invest in stocks and bonds, there is the very real possibility that investment values might decline and therefore the money for required payments won’t be there.

Given the pros and cons associated with escrow accounts it’s likely that you’re best served by having the money collected each month by the lender. It’s easy, cheap and ends worries that required tax, insurance and other payments won’t be made.