Interest Rate

• Lenders are concerned with risk and will charge a higher interest rate for loans that are perceived to be riskier. A borrower who chooses not to establish an escrow account for hazard insurance and property tax will more than likely end up paying a higher interest rate on the loan, if the lender allows it all. The reason is that the lender may foreclose for nonpayment of the insurance or the county may take action for a failure to pay the property tax. Both of these procedures could conceivably force the lender to suffer a loss at a foreclosure sale.
  
  

Budget

• A borrower is approved for a loan based on their ability to repay the mortgage principal, mortgage interest, property tax, hazard insurance and homeowner's fees. If escrows are collected, this money -- except for maintenance fees -- is part of the monthly mortgage payment, and the homeowner doesn't have to budget separately to pay the debt. The lender is required to pay the property tax so that the homeowner receives any discounts offered for early payments as long as there's sufficient funds in the escrow account.
  
  

Accrued Interest

• There are 14 states -- California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont and Wisconsin -- that require a lender to pay a consumer interest on an escrow account. If you aren't financing property in one of these states, then it might benefit you not to escrow and instead, invest the allocated funds elsewhere. This strategy works as long as the return on the investment is higher than the probable increase in the mortgage's interest rate.
  
  

Cash Flow

• Many borrowers want the ability to manage their own finances and maximize their monthly cash flow. These individuals may receive end-of-year bonuses, which are used to pay property taxes, so there's no need to make monthly payments. Likewise, investors might want to maximize monthly gains, so that there's rental income money available for unexpected expenses, such as repairs and extended vacancies. As long as the property owners have the necessary funds to pay the insurance and taxes when the bills come due, this is an acceptable strategy.