A borrower should always consider setting up a mortgage escrow account to pay for taxes and homeowner's insurance. The first reason is that they will get a lower interest rate and better terms for their loan. Lenders underwrite "no escrow" loans differently because they consider them to be more risky. Since the lender is not paying the taxes and insurance, they do not know for sure if they are going to get paid. So, a no escrow loan can cost an extra quarter point or get an interest rate that is .125% higher.

The way an escrow account works is that every month when a borrower pays their mortgage, they include 1/12 of the insurance premium and 1/12 of their annual real estate tax bill. The lender will set up an account to put the extra money into. When the tax and insurance bills are due, the lender will simply pay on behalf of the borrower. The lender also keeps 2 months of reserves in the account in case the insurance premium or tax amount increases. Many borrowers prefer this not only because of the lower interest rate, but also because they do not have to think about saving this money and paying the bill themselves when it comes due. Others perceive it as a way for the lender to hold more of their money and they would rather pay it themselves. Setting up an escrow account is always an option left to the borrower when applying for a mortgage.