Should I get rid of escrow w/ my mortgage loan?

[jnw]

I've asked the bank before in the past and they said I could opt to manually pay my property taxes and homeowner's insurance instead of using escrow account.

My homeowner's insurance and property tax amounts to about $1000 each every year.

This means the bank is hanging onto $2000 of my money for a year right?

Current money market rate is 4.5%.  4.5% of $2000 is $90 per year.

Should I get rid of it so I can invest this money instead to get my $90 per year?

That is the only pro I can see; I don't know of any cons of doing this.  Could I negotiate a better rate with homeowner's insurance if I pad them directly instead of the bank?

[jnw]

I don't know if the city allows property tax to be paid with credit card without fee; same with homeowner's insurance.  If they both didn't charge a fee then I could get 1.5% of $2000 or another $30 per year.

[CatamaranSailor]

It's rare a mortgage holder would allow that, but if yours will, I don't see any real pro..or con for that matter.

Pro: You have more control. You will know when taxes and insurance bills are due and exactly how much they are. You'll also know that they have been paid. You could put that money into a financial vehicle paying higher interest but unless you have huge tax bills, it's not that much money on a yearly basis. Most people don't really pay attention to the tax/insurance side. They just pay the mortgage payment and once year get a notice if either has gone up.

Con: Well..this may or may not be a con....You have to make sure you understand how and when your property takes are due and how their payment system works. No biggie. Insurance companies make paying them very easy, so no biggie there. You have to have the money saved. No automatic savings like escrow.

As far as negotiating homeowners insurance. You have this right no matter who is paying the bill-you or the escrow manager. Now, as part of your mortgage agreement I'm sure there is a section where you agree to have insurance, but as long as it meets the minimums, you can get it from any company you wish.

However, if you let the insurance lapse...the bank can get a policy for you (and they do NOT shop around) and just charge you for it. Not ideal.

My .02?....I'd do it because I'm a control freak. But really, the advantages are minimal.

[CatamaranSailor]

When I pay my property taxes, I use a card, but the do charge a fee. I think it's $3.95. I just think of it as saving me the hassle of driving anywhere.

[reeshau]

Wow!  That's a low escrow!

I don't have a mortgage now, but I did get rid of my escrow for several years.  Yes, the interest comes to you, rather than them.  And as for control, it bugged me when my mortgage payment was changed because they made a bad estimate of costs--that seemed arbitrary.

Another real benefit:  if you are on the borderline of itemizing taxes, then being responsible for paying your property tax directly can allow you to double up payments.  For example, our property taxes are due February 1.  We receive the notice in the fall.  So I can pay one year late--after the 1st of the year, but before the dealine--and the next year early, before the first of the year.  So, that year I essentially claim 2 years' property tax.  On the off years, the standard deduction is more valuable because I am not a close to it.

But with sub-$1,000 property tax, that doesn't move the ball much.

[jnw]

My .02?....I'd do it because I'm a control freak. But really, the advantages are minimal.

Thank you for all the great info!

I'm also a control freak -- I don't need the bank to baby sit me lol -- and the extra $90 per year is a real bonus to me.  I get great joy when I can save $90 here and there, per year.  We recently switched from coffee to tea and are saving $662 per year there.  I saved a yearly $200 on auto insurance the other day.  So between just these three examples it's an extra $952 per year... then there are dozens of other ways I save money doing similar sort of thing.  Ends up to be thousands of dollars saved when you sum them all up:)

I am low income and I started the retirement thing late (over 50) so I try to save as much as possible.  I save 1/2 my income each month and so I'll have no problem keeping $2000 on hand each year for property tax and homeowner's insurance.. saving over $20k per year and at least 1/2 of that is going into money market / t-bills.. so pretty liquid.

[secondcor521]

This means the bank is hanging onto $2000 of my money for a year right?

Current money market rate is 4.5%.  4.5% of $2000 is $90 per year.

Back when I had an escrow account, the answer would have been no.

The escrow account always had 2 months of expenses.  Then I paid into it at 1/12 of the annual total each month.  So on average, 6/12 of the annual total was in there at any given time.

Using your numbers, it would be 2/12 + 6/12 = 8/12 = 2/3 * $2,000 = $1,333.  At 4.5%, that'd be $60 per year.

Still worth doing in your case since you like to be in control.

And maybe escrow accounts are run differently nowadays.  :shrug:

[jnw]

This means the bank is hanging onto $2000 of my money for a year right?

Current money market rate is 4.5%.  4.5% of $2000 is $90 per year.

Back when I had an escrow account, the answer would have been no.

The escrow account always had 2 months of expenses.  Then I paid into it at 1/12 of the annual total each month.  So on average, 6/12 of the annual total was in there at any given time.

Using your numbers, it would be 2/12 + 6/12 = 8/12 = 2/3 * $2,000 = $1,333.  At 4.5%, that'd be $60 per year.

Still worth doing in your case since you like to be in control.

And maybe escrow accounts are run differently nowadays.  :shrug:

I'll drop by the bank and ask them tomorrow. Thanks :)

[YttriumNitrate]

How much time will it take to report the property tax and insurance payments to the bank? I'm guessing it's fairly unusual for people to directly pay the taxes and insurance when they have a mortgage, so there might not be an easy automated process for reporting payments to the bank.

[jnw]

How much time will it take to report the property tax and insurance payments to the bank? I'm guessing it's fairly unusual for people to directly pay the taxes and insurance when they have a mortgage, so there might not be an easy automated process for reporting payments to the bank.

I'll ask the bank that tomorrow as well thank you for bringing that up.

[jnw]

I guess another advantage to paying these two large bills yourself, is to perhaps use them to meet a spend requirement for churning a credit card.  There might be a small transaction fee but at least it could be used to meet a spend requirement which is giving you a nice cash back sign up bonus.  I don't know of any way to pay my mortgage payment with a credit card.. I think there is a way though perhaps.  Maybe the homeowner's insurance wouldnt' charge me a feee to pay for it with credit card  -- they didn't with my auto insurance premium.

[bacchi]

I guess another advantage to paying these two large bills yourself, is to perhaps use them to meet a spend requirement for churning a credit card.  There might be a small transaction fee but at least it could be used to meet a spend requirement which is giving you a nice cash back sign up bonus.  I don't know of any way to pay my mortgage payment with a credit card.. I think there is a way though perhaps.  Maybe the homeowner's insurance wouldnt' charge me a feee to pay for it with credit card  -- they didn't with my auto insurance premium.

Yeah, I pay my home insurance with a card, no fee. If I need to meet a minimum, I pay some of the property tax with a card as well.

I got rid of escrow because, as reeshau mentioned, the lender would always jack around on the payment at the end of the year. Their algorithms sucked.

[Psychstache]

I am on my second house and 4th mortgage company (5th if you count the originator of one of the mortgage that immediately sold it like 5 seconds later, but since I never sent them a payment I tend to ignore them) and I have never had an escrow account. Reasons were:

1. In my tax authority, property taxes season opens in October and bills are due in full by the end of January. This means that I am able to pay two round of property taxes in one year to improve the value of the standardized deduction (ex. I get the 2018 property tax bill in October 2018, pay it in January 2019, get the 2019 bill in October, pay it in December 2019). This hasn't been as impactful since the Tax Cuts and Jobs Act of 2017, but it is helpful flexibility.

2. My insurance allows for no penalty no fee CC transactions, so that is free points there.

3. Property taxes can be put on a CC, but the fees only make it worthwhile if there is a bonus I am trying to hit. Can be worthwhile in some situations though esp if you don't regularly have large expenses to make some bigger bonuses (one time I used this as an opportunity to get a Southwest Companion pass for 2 years).

4. having the cash flexibility throughout the year

5. Not getting jacked around by the bank's inability to accurately forecast the payment needs.

6. General control freak tendencies.

[snic]

OP, if your taxes and insurance are $1,000 per year, then the amount in your escrow account is not going to be $2000. The most it would be is a little over $1000. Your mortgage company is supposed to send you an escrow statement every year listing all the payments you made into escrow and all the payments they made out of it. You can probably find this information in your online account as well. That will tell you what your account balance is and how it changes through the year. Also, it could be a law in my state, but my escrow account pays (what used to be) pretty decent interest, I think 2%.

I grumbled when our bank insisted on an escrow account for property taxes (they waived it for insurance) because this is our third house and we haven't had an escrow account since the first year of home ownership 20 years ago. The bank said they'd waive escrow for taxes as well but then our rate would be higher. It turns out I'm actually fine with the escrow account. It's very convenient to make a single monthly payment rather than keep track of the 5 property tax payments I'd otherwise have to make throughout the year. And over the last three years the bank has been surprisingly good about anticipating the taxes, calculating the monthly escrow payment, and (most importantly) paying the taxes on time without screwing it up.

[reeshau]

How much time will it take to report the property tax and insurance payments to the bank? I'm guessing it's fairly unusual for people to directly pay the taxes and insurance when they have a mortgage, so there might not be an easy automated process for reporting payments to the bank.

I've never had any requirement to report my payment history to the bank.  I had no escrow under 3 different servicers.

My guess would be, they would either see that the insurance lapsed, or that a tax lien was placed on the property--that's when they would get interested.

[jnw]

I am on my second house and 4th mortgage company (5th if you count the originator of one of the mortgage that immediately sold it like 5 seconds later, but since I never sent them a payment I tend to ignore them) and I have never had an escrow account. Reasons were:

1. In my tax authority, property taxes season opens in October and bills are due in full by the end of January. This means that I am able to pay two round of property taxes in one year to improve the value of the standardized deduction (ex. I get the 2018 property tax bill in October 2018, pay it in January 2019, get the 2019 bill in October, pay it in December 2019). This hasn't been as impactful since the Tax Cuts and Jobs Act of 2017, but it is helpful flexibility.

2. My insurance allows for no penalty no fee CC transactions, so that is free points there.

3. Property taxes can be put on a CC, but the fees only make it worthwhile if there is a bonus I am trying to hit. Can be worthwhile in some situations though esp if you don't regularly have large expenses to make some bigger bonuses (one time I used this as an opportunity to get a Southwest Companion pass for 2 years).

4. having the cash flexibility throughout the year

5. Not getting jacked around by the bank's inability to accurately forecast the payment needs.

6. General control freak tendencies.

Wonderful, yeah I agree with you.  I overlooked point 4 though.  That's significant.  Say I needed $2k more for a $15k requirement for the $900 Chase Checking+Savings bonus -- which they had up until recently.

[MrGreen]

This means the bank is hanging onto $2000 of my money for a year right?

Current money market rate is 4.5%.  4.5% of $2000 is $90 per year.

Back when I had an escrow account, the answer would have been no.

The escrow account always had 2 months of expenses.  Then I paid into it at 1/12 of the annual total each month.  So on average, 6/12 of the annual total was in there at any given time.

Using your numbers, it would be 2/12 + 6/12 = 8/12 = 2/3 * $2,000 = $1,333.  At 4.5%, that'd be $60 per year.

Still worth doing in your case since you like to be in control.

And maybe escrow accounts are run differently nowadays.  :shrug:

This is still how escrow accounts are run.

On our Maryland house, the state gives you a slight discount for paying your taxes early. Before we refinanced, our lender would wait until the month the bill was due and pay the full amount. After our refinance, the new lender would pay them as soon as they received the bill which meant a very slight savings.

Here in Pender County, North Carolina there is no discount for early payment of property taxes.

I have never heard of a discount on homeowners insurance for paying directly instead of through escrow. Most places would probably go the other way because escrow is a better assurance the bill will be paid.

Another potential plus for no escrow is that you don't have to wait for any significant coverage to be refunded. Though I wouldn't expect this to be an issue for an established house. On our new houses, the property tax estimates at closing are based on sale price, which is way more than they actually are once the county sets the value of the house. On the house we just moved out of we have a $600 refund check coming which will now have to go through a mail forward to reach us. Not ideal. But this was a one time thing and I expect the escrow to be pretty spot on moving forward. If anything they end up being slightly low as property values and taxes rise because they don't know how the tax amount until the bill comes.

I've never heard of a lender allowing someone to opt out of escrow. It leaves the lender exposed to you not paying your property taxes and the county foreclosing on the house, which would supercede the bank's mortgage position. They don't like that.

[secondcor521]

I've never heard of a lender allowing someone to opt out of escrow. It leaves the lender exposed to you not paying your property taxes and the county foreclosing on the house, which would supercede the bank's mortgage position. They don't like that.

They will if you ask (and probably also need to put down at least 20%).  But they'll often increase the rate by 1/4 point or so on a new loan or charge a one time fee to drop escrow on an existing loan.  They will say this is to compensate them for the additional risk you note.

[Villanelle]

My mortgage holder (USAA, at the time) didn't require escrow and I most certainly did not do it.  It may be because we had well more than 20% down.  We have always had plenty in our accounts to cover everything. 

Our property tax has always charged a fee for paying with a credit card, unfortunately, so I pay via providing bank/check info. 

[jnw]

I contacted the bank and found out they were not paying any interest at all on my escrow account.  It currently has around $800 in it.

I just got an email from them:

"Hi Jennifer,
 
I have reviewed your account and I have approved the escrow waiver for you.
 
I will need to prepare the documents for your signature before we can update this information in our system and remove the escrow account.
 
Once I have prepared the documents, do you want to visit a branch for signing or would you like to do this online through DocuSign?
 
Thank You"

[jnw]

I replied back to her with a couple questions and she said the following:

"Jennifer,
 
We do not pay any interest on balances in your escrow account.
 
You would need to contact the County Treasurer and let them know that you will be paying the property taxes going forward.  Usually they will send you a statement in the mail a few months before the first half is due.  If you do not receive an invoice, you can go online and pay them.  It is fairly easy.  Our 3rd party vendor will notify us if you have not paid your taxes.
 
With your insurance, you would need to coordinate with your agent about your payment options and let them know that you will be paying the premiums.  They will still need to provide us with your renewal declarations page each year so that we have record the insurance is being paid.  Our 3rd party vendor will send you letters if they have not received the proof of insurance paid each year.
 
Please let me know if you would like to move forward with closing your escrow account.  Thank You"

[secondcor521]

I replied back to her with a couple questions and she said the following:

"Jennifer,
 
We do not pay any interest on balances in your escrow account.
 
You would need to contact the County Treasurer and let them know that you will be paying the property taxes going forward.  Usually they will send you a statement in the mail a few months before the first half is due.  If you do not receive an invoice, you can go online and pay them.  It is fairly easy.  Our 3rd party vendor will notify us if you have not paid your taxes.
 
With your insurance, you would need to coordinate with your agent about your payment options and let them know that you will be paying the premiums.  They will still need to provide us with your renewal declarations page each year so that we have record the insurance is being paid.  Our 3rd party vendor will send you letters if they have not received the proof of insurance paid each year.
 
Please let me know if you would like to move forward with closing your escrow account.  Thank You"

That all seems pretty normal.

You should expect / ask the lender to refund the remaining balance in your escrow account to you once you have canceled it.

And I would, just as a matter of course, make sure that both the property taxes and insurance payments made by the lender were all properly credited and that the amounts I started paying were as expected.  Usually everything is correct, but mistakes happen.

[Villanelle]

I get a property tax bill from my state and pay it 2x year.  It's not complicated or different than any other bill.  I do set a reminder in my electronic calendar for a few weeks before it's due, just in case the bill doesn't arrive, but that's never happened.  My insurance is set to pay automatically. 

I've never escrowed either so I can't speak to the process of transitioning, but I'd think that as long as you notify the tax authority and insurance company, and make sure you follow up for the first payments to make sure everything is mailing and billing correctly, I don't really see how it would go awry.  Make sure they pay you the $800 balance (or apply it to the relevant bills).  That's it. 

[jnw]

Yeah I am expecting them to write me a check for the escrow balance; I automatically assume they will do that.  I will ask.

Btw, I've been reading The Complete Tightwad Gazette the past week and finally got to page 400 a few minutes ago.  On page 400, she shares this trick, closing an escrow account, and setting up your own in an account which pays (higher) interest. I believe interest rates were 8-10% back when she wrote the book.

[sonofsven]

I used to keep my property tax and income tax money in a savings account of its own, but now I use my emergency fund as a combo E/slush fund and pay it from there each fall. My insurance I pay monthly with my auto insurance at USAA.
I use the E/slush fund for churning bank bonuses. In an emergency all the money is available, I would just potentially lose out on some of the bonuses.
I also have a HSA I could pull tens of thousands out of if needed.
Also, some years (like this year) I will pay my taxes on a credit card, even though the county charges 2%, so I can meet the sign up bonus on a card, but only if the bonus is big enough to make up for the 2%. My property taxes are right around $2500 so the 2% is not much. Otherwise I can have trouble meeting the spend requirements on some of the bigger bonuses.
Most of the card offers lately have been 0% for (x) months, so setting up a monthly auto payment is an option also.

Giving the bank my money to hold in escrow bugs me, a mustachian people problem.