If you’re stuck between paying down the balance on the principal or escrow on your mortgage, always go with the principal first. By paying towards the principal on your mortgage, you’re actually paying on the existing debt, which brings you closer to owning your home.
On the other hand, escrow is essentially third-party funds to cover things like property taxes, homeowners’ insurance fees, and future interest, so if it is really bugging you this is another option.
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. This happens by minimizing potential interest.
Paying the principal first also increases your home’s equity. Since equity is the difference between your home’s worth and what you owe on the principal, paying principal first will increase your equity much faster. Once you have equity in your home, you can use home equity to take loans and lines of credit, like HELOC, which can be used for upgrades or to pay bills if you’re stuck.
Staying ahead on your payments will also give you a sense of security in your homeownership. By focusing on the principal and shortening the length of your mortgage, you can have the peace of mind that comes with knowing you won’t be scrambling to make a payment in the event of an emergency situation. Falling behind on payments is not only stressful, it can impact other aspects of your life.
Escrow, however, shouldn’t be neglected entirely. Remember that escrow account(s) will keep all parties protected during a real estate transaction. And, with mortgage payments will come tax and insurance payments. Escrow accounts – usually managed by third-party escrow services – are for precisely this. Whatever you pay into escrow will be used to cover these costs.
That said, if you find yourself in a scenario where you can do without an escrow account, it may be fitting to nix it. Having an escrow account means that your mortgage will be higher, so if you’re able to buy straight up or put up a substantial down-payment, you’ll save in the long game.
When it comes to paying either principal or escrow first, it’s a wise choice to go with the principal. You’ll be one step closer to owning your home, free and clear, and you’ll have access to equity, among a litany of other benefits.
