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 company will get a bill from your local city or county tax office and the insurance company and they just send them a check on our behalf.
2. Knowing that this is going to be taken care of by them many homeowners feel that this is comforting to know that its always going to be paid on time and its one less thing for them to worry about. The majority of homeowners elect for the escrow account thinking that they are coming out ahead. But are they?
3. The answer is no. Think about it this way. You are paying your taxes and insurance 6 or 12 months in advanced to a company to hold it in their escrow account. Not your account but their escrow account. What do you think this extra money you pay on top of your mortgage payment is doing? How about earning the mortgage company interest on your money. Since your property taxes and home owners insurance are not due for another 6 months its not like they are going to give up free money. They keep your money in their account and earn interest on it. Bet you did not want to hear that. This is such a cash cow for the mortgage company servicing your home loan. Not only will they know you are up to date with your property taxes and home owners insurance but they are just letting their bank account get fatter with interest you could have been earning. All because you want them to pay your bills.
4. Grow up already. If you can write out your monthly bill to pay your mortgage on time, why can’t you write a check to your county tax office or home owners insurance company on time. I know its depressing when you ahve to write a check out for a couple extra thousand dollars to pay your taxes and insurance (and it always seems that they are due around Christmas time) but think about how much you are giving up. I’m sure you didn’t buy the home in the first place thinking you could not pay your mortgage. So why go against your thinking to help out the mortgage company more.
5. As an example, let’s say your yearly property taxes and home owners insurance are $4,000. This would make your monthly esrow payment $333. If you had a 30 year fixed rate mortgage of $125k at 6% your principal and interest payment would be $750 a month. If you escrowed it would be $750 + $333= $1,083. Now, let’s put that $333 in a savings account that earns 2.5% -3%. You can find many online bank accounts like ING Direct and Emmigrant Bank that pay you these rates. If you put the $333 away each month and over one year your $4k would earn $120 at 3% in interest. This is for doing nothing but just putting it aside each month. The $120 is almost half of a month of escrow payments. A $120 might not sound like a lot but its better than giving the mortgage company the money.
6. Going back to the mortgage company 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. Sucks seeing that. Take your money back and earn some your self.
7. Some county tax offices and home owners insurance companies will offer you a discount if you can pay ahead of time. It might not be a lot but if you have the extra money laying around to do it then why not. If the discount is more than what you could earn in interest in your savings account then the opportunity cost to do it far out weighs not doing it. If you asked your mortgage company to do this for you they will not do it and why would they. They will not earn interest on your money and they do not care about paying less taxes with your money. All they need to do is have your check post dated one day before its due. This way they can earn maximum amount of interest off of your money.
8. One of the biggest complaints with mortgage companies is that they screw up the escrow accounts anyways. If you plan on refinancing your mortgage with a different company than your current one than the new one will have to set up a new escrow account. Whatever money you had in your previous escrow account will be sent to you in a check within 10 days after closing but now the new escrow account needs to collect more from you to have at least 2 months worth of reserves. This is a policy most mortgage companies make. They want the two months of additional cash in there in case your state or county raises property taxes or if your home owners insurance company does the same. So with our example above with $4k, they really need $4,666 laying around earning them interest. If you ask to pay your taxes and insurance separately most mortgage lenders charge you an additional cost of .25% of the loan amount to do that. On our $125k this is $312 on top of your normal closing costs. Its like they want to earn more money from you some way or another. If you plan on buying a home I hope you have more than just your down payment and closing costs saved up. If you plan to escrow you will need your down payment + closing costs (no such thing as a no closing cost mortgage) + 2-6 months worth of escrow (need to put that reserve in there for the mortgage company to make sure they have enough to pay your taxes and home owners insurance) + any money that the previous home owner has paid on the tax bill for that property up to date. This can be a shocker for most first time home buyers because they did not know about the extra money for the escrow. Sometimes this will dis-qualify them for buying a home all together because they do not have enough saved up.
9. When your property taxes and home owners insurance goes up so will your monthly mortgage payment if you have it escrowed. It might only be $10 but it does go up. You will get a notice but I’m sure its a notice you do not want to see. If you did not have them escrowed you could deal with the county office at your own time. Since you escrowed you have to make the full mortgage payment or you will get a late on your credit report dropping your credit score and possible declining you from future refinances or home purchases. If you are battling with the tax office over raised property taxes and refuse to pay them then it will not show up on your credit report until well after they are due. You have been saving the money so you have it but hate seeing the Government raise taxes just because they can. Keep on making your mortgage payment so you do not fall behind. If you escrowed you would be forced to make the higher payment.
10. Do the smart thing and budget to pay your taxes and home owners insurance on your own. By doing so you will earn interest on your money and have better control of what your money is doing. You will not have to worry about your mortgage company sending your bill to the wrong office or getting notices that you do not have enough in your escrow account to make the tax bill (it does happen sometimes). Don’t give the mortgage company any more money than you need to. It does look like our President is going to sign a law in reforming the whole mortgage industry pretty soon. All and all it looks like a good bill except for the part where he is making new home owners and people refinancing, escrow their property taxes and insurance. I hope that part of the bill gets taken out. I think he’s doing it so the mortgage lenders can have more cash reserves on hand to help them get through this financial disaster. If you need to refinance a home loan or plan on buying a home get it done before the bill gets passed so you do not have to escrow with your mortgage.