The Top 10 Reasons You Should Never Escrow Your Property Taxes And Home Owners Insurance With Your Mortgage

[...] Find Free Articles. Submit Yours. Share AdSense Revenue. | Earnticle.com wrote an interesting post today onHere’s a quick excerpt 1. Mortgage companies love it when you tell them that you want to escrow your taxes and insurance with your mortgage payment. It reassures them that you are paying your taxes and home owners insurance every month and they get to manage. As long as you make your monthly mortgage payment there is nothing for them to worry about. The additional money you pay every month is collected by the mortgage company and put in a escrow account. When your taxes and home owners insurance are due the mortgage [...]

[...] The Top 10 Reasons You Should Never Escrow Your Property Taxes And Home Owners Insurance With Your M… [...]

In a tax deed sale, the county government will sell full ownership and possession rights of the property.

Great peice, and written today!

I won the right to pay my own taxes and insurance, had to pay $150 for that right on a 30-year 5.625% fixed but I feel it is worth it: crunched the numbers. Mortgage payments run $4200 per year; quarterly taxes amount to around $2000 (tax office is 250 ft from my condo and I will walk there when I pay them on August 1) with homeowners being $316/year with at least a 10% discount for paying one lump sum; same discount for auto insurance. Income varies throughout the year (summer is lowest but March and September are pretty high). Lastly I habitually keep a supply of free cash available so the 5 non-escrow checks a year come out of this source which I replenish in the course of my securities trades.

Dangers with escrow: the mortgage companies have been known to be late with the payments, incurring late fees which they then charge you. They also of course will pay insurance in installments–the higher payments mean cash flow to them.

I don’t know whether “W” is the source of the mandatory escrow (hope I’m grandfathered from escrow; I’d seriously consider selling some assets and paying off the mortgage rather than escrow, especially as I’m “thinning the securities herd” as the fall financial storms approach); it sounds like the sort of thing many Democrats like, sort of like union dues for a closed shop of a mortgage-borrowers union.

What is important is that rather than earning interest on the escrow, the escrows are cash float for the mortgage companies. Float is a Useful Thing and can be a lifesaver for the mortgage companies who if you look at their finances are always “skating on thin ice”; a 5% default rate would be fatal to many of them. Further, no one has yet successfully explained to me how a CMO actually functions.

An example of the Power of the Float: I’m a mean nasty person who charges a lot on credit cards ($13,000+ last year) but who pays in full each month like the old department store charge cards. I would not be caught dead using a debit card: might as well use Federal Reserve Notes. Right this minute I have charged $592 this month sine June 27 but not paid for it yet; that will happen in mid-August (I track the card charges: see, I’m a mean expletive-deleted). By then I will be hundreds of $$ into the next month’s bill so the process repeats. Effectively a month’s worth of purchases on an average net-20 days or so basis–and the credit card company gives me a %1 rebate too!

Oh yes, it took years of study of corporate and business finance to get to the point of doing this–aplying business principles to Ordinary Life. Also saving money and not blowing it when young on frivolous things. Choose wisely. Yes, I am doing a Slow Liquidation but the money is in line to outlast me, and getting more income through work is the solution. The job(s) is sort of like the crops (corn, wheat, etc.) and the securities are sort of like the critter end of the “farm”.
An aside: I’ve been told that in many parts of Pennsylvania there are part-time farmers; they have 2-day week jobs and spend the rest of the time farming. This explains the fairly rich looking farmsteads you see in some areas with the pricey cars in the driveways.

@ Nathan

Sounds like you took the time to figure everything out ahead of time. Most people don’t take the time to learn this or do not care too because it is never taught to us.

From what you wrote it looks you are a financially savvy person. I agree with everything you said.

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[...] 0 Comments 1. Right now around the country your home is taxed based on a percentage of what the value or home is worth based on what the county assessor thinks it is worth. As an example lets say your local county government has a property tax of 1% and your home was assessed at $300k. You would pay $300k x 1%= $3000 a year in property taxes. [...]

This article is fair enough, but what you fail to mention is that some mortgage companies will offer a lower rate if you escrow taxes - in my case, .125%. Do the math, and I think you’ll find that taking the .125% on the full value of the loan, vs. the interest on your relatively small tax bill makes sense.

If they’re not offering you anything, then I agree - pay it yourself. However, to say “never” is wrong. People need to take the example and do the math themselves.

@ Kyle

I agree with the .125% over the life of the loan, but I had never heard of that happening. I worked as a mortgage banker for over 2 years and the company I worked at never gave a lower interest rate for escrowing your property taxes and insurance. Company policy was to charge the client a .25% fee on top of your closing costs for an escrow waiver. So at closing you would have your normal closing costs plus that fee. On a $100k loan that would be $100k x .25%=$250 to pay your taxes and insurance separately. The rate has nothing to do with it in this situation because they are not related. Mortgage companies and banks like it when you escrow because you are giving them more money to hold in their accounts so they can earn interest on your money. A lot of times mortgage bankers and brokers would make what you said into a play on words to make you feel like your getting a better deal.

1) Shopping around for a mortgage - ALL lenders offered me 0.25% discount if I choose to escrow !!! I still would not escrow just for the freedom of managing my own money the way I choose.

2) Your math is wrong in several places:
- ” you put the $333 away each month and over one year your $4k would earn $120 at 3% in interest.” — not quite so. (I’m rounding in all the figures below for simplicity) you get 3% only on your 1st payment. the 2nd earns 11 months of interest (2.75%), the 3rd only 10 months (2.5%) and so on. The last deposit should basically earn zero assuming you pay the whole amount at that time, but again for simplicity in rough figures you would earn through the year just 1.5% on your $333 => ~$60.

- “…if you let them escrow your money and they put it in a savings account earning them 3% its like you are paying them 9% interest on your money. The 6% from your 30 year fixed rate mortgage and the 3% they are earning on your money in interest from your escrow..” — again, wrong. You pay 6% on your loan (let’s assume currently 80% of your home value) and 3% on your insurance and taxes (depends on where you live, but it’s safe to assume your tax will be at most 2% of your home value and insurance will roughly cost 0.5%) ==> so they will gain an additional 3% (or closer to 1.5% as shown above) on a much lower sum …
Even using your own figures - they are making 6% on $125K + 3% on $4K ==> adding a tiny 0.1% to the 6%… (All my calculations above are not accurate and are VERY simplified to save time and still show the point)

ANYWAY, I agree with your conclusion not to escrow, and as I said gave up 0.25% interest (5.875 vs 5.625) to buy my freedom to manage my own money my way.

@ Shy

Thanks for commenting.
1. I worked at a mortgage company for over 2 years. Every day we would get our interest rates for all of our programs. On top of what the interest rates were there would be price adjustments (points) for certain things. An example would be to charge a client 1% of their loan amount as a additional cost ON TOP of their closing costs if they took cash out of the equity of their home over 80% of the value of the house. At the company I worked at we charged ALL clients .25% (one time cost, i.e $100k loan x .25% =$250 additional charge) if they DID NOT escrow their property taxes and insurance. This is common amongst all lenders. Lenders want to have you escrow your taxes and insurance because it makes you pay them every month so you do not get behind. I applaud you for not escrowing. The interest rate has nothing to do with it. In most cases the mortgage banker or broker used it as a play on words or made you think that you were getting a deal. Check your closing documents from your last mortgage and you might see a “origination fee” or “discount points” on there. It might also be that the mortgage banker initially tried to sell you loan with a higher rate to cover the .25% cost and was able to “go short” to get you the deal. If you want to know for yourself just call a mortgage lender like Quicken Loans or Countrywide and ask them if they charge for paying your taxes and insurance separately. You will find out that they do.

2. You got me on the math part there. I assumed I already had $4k in the bank when I did this not taking into consideration that the savings account started at $0.

3. The 3% is what I hypothetically said they probably earn in their savings accounts. I agree with the tax and insurance % but I just made up those numbers. Are you taking an average to get the .1%? I do not see how you got that #. Are you adding the $125k +$4k to get $129k than using $125k/$129k to get the less than 1%. If so doesn’t this only mean that the balance they can earn interest on has only gone up by 1% and says nothing about the interest that it earns? All I see is two separate accounts, one earning 6% and another earning 3%. Regardless of what the balances are they are still earning those %’s.

I am confident about the first answer, you got me on the second, and I feel that we both are right about the third. So I guess it would be a draw in a competition. I hope this shows everybody even more reasons to not escrow their property taxes and insurances.

I have a mortagage and I escrowed the insurance and taxes. Is it too late to change it. I would rather have a lower mortgage payment. I didn’t realize I didn’t have to escrow. I would much rather pay these bills on my own. They all take credit cards which is great. My mortgage company will put 1% towards mortgage principle when I use their credit card.

[...] The Top 10 Reasons You Should Never Escrow Your Property Taxes And Home Owners Insurance With Your M… [...]

I am purchasing a pre-owned Mobile Home, and the lender says I have to escrow taxes. I have been paying on my property for a little over five years, and have receipts showing I have paid each year’s property tax in full and on time.
I need to know, Do I have the choice of not escrowing? Can they force me to escrow legally? And, if I do escrow, will I still have to pay the county my property tax every year, also?
Thanks, Carolyn

what type of a fee will the mortgage co. charge me to stop
the escrow and pay the insurance and taxes on my own?

What kind of fee can the mortgage co. charge if I chose to
pay the escrow on my own? I’ve had this mortgage since 1992.

@ Floyd

The mortgage company will usually charge you .25% of the loan as an additional charge to let you pay your taxes and insurance separetly.

i.e $100k loan x .25% = $250 more in closing costs.

@ Carolyn

It depends on the mortgage company. With all of the changes in the mortgage industry the only way some mortgage companies will let you pay your taxes and insurance separetly is if you put a 20% down payment. Mobile homes have different financing guidelines than brick and mortar homes. So it might be because the mobile home lender makes their own rules and thats how it goes.

Alright, but don’t I *have* to escrow my taxes? I mean, is it really an option as a borrower? I was always under the impression that unless you had a certain LTV ratio, the bank would require that you escrow the taxes.

@ Dave
From what I remember you are correct. If you have under a certain LTV then you do not have to. If you chose to keep them separate the mortgage company would still charge .25% for you to do it which is BS. The one thing I remember the most was how loans would get caught up in processing because we had to deal with an escrow company or we had to collect a lot more money to keep in escrow then what we assumed. Sometimes it killed a deal because the borrower did not have the equity to roll it in on the money to pay it out of pocket.

Anyone know if property tax escrow is required for HARP refinance? I know its required for the HAMP–but what about HARP? I want to avoid this.