Mortgage companies love it when you tell them you want to escrow your property taxes and homeowners insurance with your mortgage payment. It reassures them that you are paying your property taxes and homeowners insurance every month.
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 property taxes and homeowners insurance are due, the mortgage company sends a check to your city/county tax office and your insurance company.
Many homeowners find comfort in knowing this is 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?
Not really. Think about it this way. You are paying your property taxes and homeowners insurance 6 or 12 months in advance to a company to hold it in 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. This is 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 homeowners insurance but their bank accounts are getting fatter with interest you could have been earning. All because you want them to pay your bills.
Most mortgage companies charge .25% ($200,000 loan as example x .25% = $500) for an escrow waiver which is a cost to do business. Sometimes you can negotiate that off. Sometimes not. Its sold to you as being risky for them since they do not know whats going on with your property taxes and homeowners insurance. You should look at it as a way for them to make more money. Wouldn’t they rather you have that $500 in the example above to have to make your tax and insurance payment? No.
You Can Do It
I have made the comment to some to grow up already. If you can write a check to pay your mortgage on time than why can’t you write a check to your county tax office or homeowners insurance company on time.
I know it’s depressing to write a check for a couple thousand dollars to pay your property taxes and homeowners insurance (and it always seems they are due in the middle of summer and around Christmas) 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.
Let’s say your yearly property taxes and homeowners insurance are $4,000. This would make your monthly escrow 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 + $333 (escrow)= $1,083.
Now, let’s put that $333 in a savings account or even a S&P 500 Index Fund. If you put the $333 away each month 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 which might not sound like a lot but its better than giving the mortgage company the money.
Most S&P 500 Index Funds earn around 7% a year. The $4k at 7% = $280 a year in returns.
If you let the mortgage company 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.
Puts You In Control
Cash Back – There is a good possibility your homeowners insurance is with the same company you buy car insurance from. And most insurance companies allow you to pay those bills with credit cards. Can it be assumed you have some sort of cash back or airlines credit card? If you escrow, you’re losing out on the cash back or airline miles you could be earning if you paid it on your own.
Most mortgage companies do not let you make mortgage payments with credit cards because they have to pay the fees. They allow you to write checks or do bank withdrawals. Neither which earns credit card rewards.
Discounts – Some county tax offices and homeowners insurance companies offer discounts if you pay ahead of time. If the discount is more than what you could earn in interest in your savings account then the opportunity cost to do so 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 the maximum amount of interest off of your money.
No More Screwing Up Your Escrow – This does not happen a whole lot but occasionally a mortgage company will screw up the escrow account. And if you plan on refinancing your mortgage with a different company 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 of closing but now the new escrow account needs to collect two months of reserves up front. You will need to come up with this money somehow. If you paid your property taxes and homeowners on your own this would never be an issue.
Dispute Rising Property Taxes & Costs – If your county tax office or homeowners insurance company decide to raise taxes or costs they will send the bill to the mortgage company. In turn, they will adjust your payment (up) accordingly. If you did not escrow you could at least be in a position to dispute those with the tax office or insurance company. Not so with the mortgage company. If you do not pay them they will ding your credit report with a mortgage late.
If you can set aside money every month to pay your property taxes and homeowners insurance than do 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.
Never escrow might be a little strong. For a lot of people it comes down to piece of mind. And not getting shocked when the huge summer property tax bill comes in.
At a minimum, you should know what you’re giving up if you choose to escrow your property taxes and homeowners insurance.