Handling Our Own Escrow
After reading about a change in house payment over at I’ve Paid For This Twice Already, I decided to look into removing our escrow from our mortgage payment. I contacted Countrywide and asked if we could handle our own escrow and what the procedure is. A couple of days later they informed me that our account meets the requirements for escrow deletion and I just need to confirm via email that this is what we want to do. We talked it over and decided to handle our own escrow.
Escrow, in this case, is the amount of your house payment that goes toward paying property taxes and insurance. The mortgage company figures out the annual costs of these items, divides by twelve, and adds this amount to your principal and interest payment. When the time comes, the mortgage company pays the taxes and homeowner’s insurance. Each year if these costs change the mortgage company figures the new monthly cost and either increases or decreases your monthly payment to compensate. Because the mortgage company is required to hold two month’s worth of escrow payments in reserve, you generally see a large increase if your escrow amount goes up. This happens because not only do they have to cover the increased expenses, but the reserve amount is higher as well.
What does the mortgage company do with all these monthly payments while they’re waiting for the tax and insurance bills to come due? Why they put them in an interest bearing account and earn more money. So not only do you have to give the mortgage company two extra months of payments, but you incur the opportunity cost of lost interest earnings on that money. This is the main reason we decided to handle these bills ourselves. Because our insurance and tax bills are due early in the year, we currently have an escrow balance of nearly $2200. This money is coming back to us and will be put into our Irregular Expenses account, so we can earn the interest on it now. When the time comes, we’ll pay the bills.
By doing this we drop our monthly mortgage payment by about $244. Most of this “extra” money will go to the Irregular Expenses account to make sure there are funds available when we need to pay the bills. Because we put more in Irregular Expenses each month than we spend in this category (on purpose), we’ll up our Fun budget by $25/month.
Sure, we now have two extra bills to pay each year, but we’ll also be earning more interest than we were before. This additional income offsets the minuscule time expense of paying these extra bills. Every little bit helps and handling our own property tax and insurance payments is a way to get a little bit extra.
Another advantage to handling your own escrow is that YOU get your annual tax assessment statements and have the timely opportunity to review–and contest–any alarming increases.
When I got my mortgage I requested to handle my own escrow. Even though I was putting 20% down, I still had to pay a fee (I think it was $500) for the privelege. Often lenders will charge this fee, and other times they won’t even allow you to opt out of the escrow requirement. It depends on the company.
December 12th, 2007 at 11:45 amThat’s brilliant! I didn’t even know that was an option. I’ll have to look into it.
December 12th, 2007 at 12:04 pmGlad you were inspired! Sadly I need to get my mortgage lower to qualify but… as with everything else, someday!
December 12th, 2007 at 7:20 pm[…] Handling Your Own Escrow […]
December 17th, 2007 at 7:48 amWe also had to pay a fee to handle our own escrow even though we put 20% down. Yes, my payments go into a high interest savings account and I pay off the taxes and insurance myself. I like the fact my payments do not suddenly increase because they didn’t plan well for my taxes.
It take someone who is disciplined to do this.
December 17th, 2007 at 7:54 amI have always done it this way ever since a mortgage company paid my tax bill late. No use getting dinged with interest and late fees because your bank is stupid. They of course had no credible explanation for this faux pas and suddenly had no problem with us opting out of escrow. We have opted out ever since. So every year I am forced to review my house insurance and my property taxes. Very good thing to do.
December 17th, 2007 at 9:04 amWhen we refinanced with ING Direct, they didn’t do escrow. We started doing it ourselves and are quite happy.
We pay our property taxes quarterly, so I transfer 1/12 of the money in there each month ‘Property Tax’ ING account, and then out on the third month to pay the bill.
We make about $10-20 a year on the interest, and we have total control!
December 17th, 2007 at 10:00 am@paidtwice
December 17th, 2007 at 10:59 amWhen you ask mortgage company for escrow dismissal and your current equity is less than 20%, they will send a letter with two options - 1. amount of principal to pay up to 20% and 2. re-appraisal. During re-appraisal, the property value written into the mortgage gets adjusted to the current market price, yet the mortgage principal stays the same. If the value of your home increased over the years, then re-appraisal will boost your equity ratio. Re-appraisal is not free though. Do the math and see what’s worth to do. Another twist might be with property taxes. Check to see what it is valued at at the assessor’s office (base for the taxes). Re-appraisal might prompt tax adjustment if your county were not keeping up (unlikely).
In my case: original house sale $160k, mortgage $140k (p/e 10%); after 5 years house value increased to $215k, mortgage principal $133k. Re-appraisal ($350) boosted p/e from 17% to 38%. Mortgage company sent escrow back, which I put in high-yeild savings account. When the time came to pay this year’s taxes, I sent one big check and kept earned interest.
If it is something you are comfortable managing, you are certaintly better off keeping the money in a high-yield savings/mma, then paying the bill when it comes due.
Best Wishes,
December 18th, 2007 at 11:22 amD4L
We had to pay a fee but still decided it was worth it. We made the arrangements with the mortgage company to waive escrow. However, when they sent the final version of the paperwork the day before closing they had “forgotten” to take off the escrow option. That caused a major panic right before closing because we had already made an agreement in writing and they disregarded it, making us suspicious of everything else in the contract. Everything worked out fine but it pays to double check on the details because they know what a benefit it is to be earning YOUR interest.
The other benefit is that I get a discount for paying my taxes early, and that would not be given if the escrow were paying for it.
December 18th, 2007 at 12:11 pmHandling Our Own Escrow is a quite interesting post but quite difficult to understand for me -
December 18th, 2007 at 3:07 pm[…] for a Million talks about handling your own escrow instead of letting the bank do it for […]
December 21st, 2007 at 6:36 amMany Credit Unions offer a no escrow option from the beggining of your mortgage. They will also set up separate saving accounts just for your escrow that you earn interest on and walk you through the process. You can probably find a better interest rate online but you will never get the advice and service that the credit union will offer.
December 21st, 2007 at 4:45 pmInteresting information thanks for writing
December 30th, 2007 at 6:36 pmHere is a good one. I carried my loan with Chase bank for 3 years without a problem or late payment. I waived my right to not escrow and paid my taxes at my own pace. Since the county has a more lenient time frame to pay in any late cases, typically I ran a little late in paying the taxes. 6 months ago Chase, just decided to reevaluate and slapped an escrow account automatically, my mortgage payment nearly doubled and now I struggle to make the monthly payment. So now my mortgage is in jeopardy as I try to manage this huge monthly payment of late taxes and the escrow amount fore casted and the bank offers no help!
January 15th, 2008 at 12:19 pmIn January of 2007,we had county water available to our small community.We decided to hook up with the county,as our well water was not to our satisfaction.We live in a very rural area in NC,and our water department decided to have us make our payments to the tax office.It is called a water assesment fee.Your basic hook up fee.The county gave us a year to pay interest free.We started making payments.I believe we had paid $200 -$300 of the &1200 or so that was due.In January of 2013 it was to be considered delinquent.All of my neighbors,myself included,received letters from their mortgage companies.CHASE IS THE ONLY ONE WHO TOOK IT UPON THEMSELVES TO PAY THIS water assesment fee.Chase misread this as a very past due tax,and paid it in July of 2007.They then forced us into escrow.My husband had a credit score of 917,which I am told is unheard of.I had a credit score of 750 which is just ok.It still shows we both pay what we owe.Our house payment has gone from $472.91 to $742 .I have been with Chase since 2000 and have only been late one time.Chase has gone on to pay other things that were not due,and have really punched the fees to me and my husband.We are not rich,and Chase refuses to back down from their position.They called my local tax office and asked them if the money was not owed the day the water lines were installed,of course it was,and now I am out of my money.I have paid all my fees.I am even 2 months ahead on my payments.I am trying to refinance.The customer service tells me a different story every time I call.One person told me I had to speak to the escrow department,and the escrow department was closed for the day.I was told to call at a later time.I called the next day to pay the ESCROW DEPARTMENT AND WAS TOLD THERE WAS NOT AN ESCROW DEPARTMENT.What do I need to do to get this over with?I have cried,prayed,begged,and still to no avail.They stiil get to screw me over and look as though they have done no wrong.I appreciate any help you can give me.Sincerely,Charli
March 6th, 2008 at 8:11 am