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

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29 Comments Add yours

1. Savings Account
   July 23, 2008
   9:29 pm

   In a tax deed sale, the county government will sell full ownership and possession rights of the property.
2. Nathan Redshield
   July 24, 2008
   11:50 pm

   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.
3. Brad G
   July 24, 2008
   11:58 pm

   @ 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.
4. Kyle
   August 22, 2008
   9:59 pm

   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.
5. Brad G
   August 23, 2008
   4:31 pm

   @ 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.
6. shy
   September 10, 2008
   2:08 am

   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.
7. Brad G
   September 10, 2008
   4:02 am

   @ 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.
8. carol minkwitz
   September 15, 2008
   2:43 am

   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.
9. Carolyn Hardin
   December 24, 2008
   8:26 pm

   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
10. Floyd Woosley
    December 24, 2008
    8:50 pm

    what type of a fee will the mortgage co. charge me to stop
    the escrow and pay the insurance and taxes on my own?
11. Floyd Woosley
    December 24, 2008
    8:56 pm

    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.
12. Brad G
    December 24, 2008
    9:58 pm

    @ 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.
13. Brad G
    December 24, 2008
    10:01 pm

    @ 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.
14. David Z
    May 7, 2009
    4:14 am

    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.
15. Brad G
    May 7, 2009
    1:50 pm

    @ 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.
16. Brian
    June 11, 2009
    2:17 am

    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.
17. Tony
    July 26, 2009
    3:48 pm

    I lost my Job and spent the escrow tax money to stay a foat. Now that work is back to normal My taxes is late and my mortgage company is threating to add it to my monthly mortgage. what can I do to stop them.
18. Brad G
    July 28, 2009
    9:10 pm

    @ Tony
    Try calling the county to get on a payment plan for your taxes. I dont think the mortgage company can do anything.
19. WTF
    August 17, 2009
    4:10 pm

    you guys are probably the same people trying to get rid of Social security withholding. these are items which will insure your future is secured. if you can afford to make the payments, you should. interest is paid on all amounts held in escrow. but as you can see escrowing is a program not meant for all.
20. Brad G
    August 17, 2009
    4:18 pm

    @ WTF

    Just one person here. I am all for eliminating Social Security with holding or at least giving people the chance to remove themselves from the program. Did you know that social security is bankrupting the U.S future and is one of the biggest ponzi schemes of all time? I got a letter last year from the social security administration saying that they will be bankrupt by 2029. Why would I want to pay into that?
    Interest is earned for the company, not you in a escrow account. I agree that it is for some but if you can budget you can earn more money by keeping it in savings accounts at least.
21. Diane H.
    September 1, 2009
    8:17 pm

    this article is way outdated, here on planet earth, USA banks are barely paying 0.1% interest, so how much really are you giving those terry nickell diming banks? better off to ban the beefsteak.
22. Kevin nelson
    September 11, 2009
    7:06 am

    As someone with several years processing and underwriting mortgage loans, I must say you make some valid points. However, there are a couple errors in your posting I need to adress… 1. There are federal regulations that regulate mortgage companies from earning interest on borrowers escrow accounts. Most mortgage companies are forbidden by law from earning ANY interest on a borrowers escrow fund. Mortgage companies are also required to give the borrower an aggregate adjustment for any extra monies in the escrow account once the tax insr bills are paid. 2. There ARE such things as “no closing cost mortgages”. Relocation loans (a special type of loan where a borrower is moving from one company location to another) offer borrowers the benefit of a direct bill credit. This means the borrowers closing costs will (most of the time) be completly paid for by the relocation company. The best point made in your post though is that it would be greatly beneficial for the borrower to set up their own investment account to put their own escrow payments in, allowing them to earn some interest on their own money. The fact remains though that a majority of borrowers chose to set up an escrow account for the convenience of it and nothing else.
23. Brad G
    September 14, 2009
    8:50 pm

    @ Kevin

    Can you find info on the federal regulation? I could not find it.

    There is no such as a no closing cost loan. If the company is paying for you to relocate then they are assuming your costs. Hence, costs.
24. Brad G
    September 14, 2009
    8:52 pm

    @ Diane

    The article is out dated but the point is still the same. Would you rather earn .0001% with your money in a savings account or escrow it with the bank and earn 0%? Something is better than nothing.
25. Mark Weiss, P.E.
    December 29, 2009
    4:10 am

    The property tax has got to be the most immoral tax on earth.
    How can a vital essential to life–particularly in cold northern climates–be considered taxable when food and some clothing is not?
    The logic of taxing the home or primary domicile is one of ‘they got you by the balls’ and the homeowner has no option NOT to pay, otherwise he faces a cabal of armed storm troopers bent on murdering him if he resists and chooses to protect his home for him and his family.
    In effect, the property tax criminalizes low incomes and creates legalized slavery.

    The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life. The man who produces while others dispose of his product, is a slave.
    Bear in mind that the right to property is a right to action, like all the others: it is not the right to an object, but to the action and the consequences of producing or earning that object. It is not a guarantee that a man will earn any property, but only a guarantee that he will own it if he earns it. It is the right to gain, to keep, to use and to dispose of material values.
    ["Man's Rights," The Virtue of Selfishness]
    It is only on the basis of property rights that the sphere and application of individual rights can be defined in any given social situation. Without property rights, there is no way to solve or to avoid a hopeless chaos of clashing views, interests, demands, desires, and whims.
    ["The Cashing-In: The Student 'Rebellion,'" Capitalism: The Unknown Ideal]
    The source of property rights is the law of causality. All property and all forms of wealth are produced by man’s mind and labor. As you cannot have effects without causes, so you cannot have wealth without its source: without intelligence. You cannot force intelligence to work: those who’re able to think, will not work under compulsion; those who will, won’t produce much more than the price of the whip needed to keep them enslaved.
    ["This Is John Galt Speaking," Atlas Shrugged]

    The above statements form the foundation of a free nation. Without property rights, there IS no freedom.
    The property tax is partly based on stale, Marxist class-envy politics. Karl Marx and Friedrich Engels were so eager to destroy the successful upper and middle-class “bourgeoisie.” Ever since the passage of the 16th Amendment, which granted the federal government the power to directly confiscate our income — our property — we can own nothing to which the government cannot also lay claim, at least in part. If there is a valid argument justifying taxes levied on voluntary transactions, there is absolutely no justification for a tax that is nothing less than State-sponsored theft. Though I would be incarcerated — and rightly so — for walking next door and taking money out of my neighbor’s wallet without his permission, the government makes this very act routine.
    The property tax is immoral and oppressive and deprives citizens of their necessities of warmth and shelter.
    It is with these facts that I propose that no law enforcement agent take part in the aiding and abetting of theft of homes from people who owe no voluntary mortgage, but who may be unable, due to the expanding greed of local government, to pay the extortionist and confiscatory taxes. No moral law enforcement officer should obey an order to remove an otherwise moral and law-abiding family from their rightfully owned home for inability to pay property taxes. This should be a fundamental part of the Oath Keeper’s pledge. Property and security in one’s home is a FUNDAMENTAL American right.
26. Brad G
    December 30, 2009
    6:32 pm

    @ Mark

    You took it to another level. Agreed.

    I get a kick out of how many cities around the country are going bankrupt because of the record amounts of foreclosures. Maybe if they did not do property taxes in the first place and privatize everything the country would be in a better place financially right now.
27. Mark Weiss, P.E.
    December 30, 2009
    10:12 pm

    Brad, it’s all about a small group of people wanting power over the rest of us. They convince the relatively ignorant masses (who have never been given the opportunity to learn a NON-ALTRUISTIC philosophy) that they would be better off with a nanny state, and plenty of lazy people vote for handouts. Democracies never last more than 300 years, as history has taught us, because as soon as the voters figure out that they can vote themselves a handout, it quickly becomes 51% deciding what to do with the other 49% of the people’s money. Wealth redistribution.
    A large part of this is to blame on religion, the big teacher of Altruism. The premise is that ‘every man is his brother’s keeper’ and that is used as ‘moral’ justificatio of taxation/enslavement. And it IS slavery, because if you don’t work for the government and pay those taxes, they will initiate force against you (take your house). There can be no freedom without the ability to own the fruits of one’s labors. There’s no Fourth Amendment safety if you’re taxes are in arrears.
    From a practical point, this can’t go on in a global market, where 3rd world commerce is forcing down American wages, yet school teachers and their unions continue to get 13% annual raises and job security (they can’t be fired unless they do something really bad like molest a child), while we take 10% pay cuts, layoffs, lose our 401K contributions, lose our medical, etc. And utilities double in cost every other year to the point where a family of modest means spends Christmas shivering in their own home because they had to use the heating oil money to pay the tax bill instead of buying oil. It disgusts me to no end.
28. Brad G
    January 6, 2010
    6:50 pm

    @ Mark

    I finally started thinking like you do about two years ago when I was let go from my mortgage job. I started searching for reasons why the housing market crashed. The conclusion I came up with was the Government – Federal Reserve – did it. From there I ended up learning why our government does nothing but destroy wealth, family, etc. I kind of became a Ron Paul supporter because he is a free market kind of guy and now I know why.
29. Mark Weiss, P.E.
    January 7, 2010
    3:44 am

    Brad,

    I think you’re on the right track. The government regulation distorts business activity. In order to continue to function with irrational laws, business must sometimes do nefarious things that it never would normally have to do in a purely Capitalist society. The problem is when business gets caught working around the laws and then the government says “see? that proves we need to regulate MORE.” Criminals are made through this kind of legislation. The more corrupt the government, the more corrupt the business dealings necessarily become. Look at the former USSR… the people there are so used to dealing with an oppressive and corrupt government that they have become like hardened criminals. They become opportunistic, looking for any chance to take unfair advantage of another party they are trading with, because they were conditioned this way through a lifetime of Communism.
    As America falls further and further down the Rabbit Hole, we will see the business world increasingly in bed with government, so that it can secure its survival. It’s the old “if you can’t beat ‘em, join ‘em” routine. In short, corruption of economics by government breeds corruption by business. In short, that’s what happened in the mortgage market.