We recently refinanced a mortgage and somehow in the raping of many trees, I overlooked the page that allowed me to choose whether or not to escrow my taxes and insurance into my mortgage payment. If I had caught that page, I would have OPTED OUT but I guess my head was in the clouds that day.
If you are new to mortgages, here is what I’m talking about: Your monthly mortgage payment includes a principal payment plus amortized interest. The mortgage company usually gives you the option of paying a few hundred dollars extra per month so that they can keep that money in an escrow account to pay your annual property taxes and homeowners’ insurance. Isn’t that so kind of them?
Well, not really. They do not do this because they are kind. They do it for two reasons:
I am not a lender so I am not 100% sure that the lender earns interest on your escrow account, although my insurance agent assures me that they do. But I do know that they do not have to pay YOU any interest whatsoever so you could be keeping thousands of dollars in this account per year, earning ZERO on it. Plus, they pad this account to make sure they have enough for these bills. The law allows them to estimate the total of taxes and insurance and add 1/6 more.
With this high cash reserve from your escrowed money, the bank can now lend out more money and make more money on those loans based on our system of fractional reserve banking.
I live in a very high property tax rate county. Taxes for homes in my area are regularly assessed at $20,000 per year. So do the opportunity-cost math for where you should put that $20,000 before it comes called up by the tax man.
Some interest-bearing account > 0 interest-bearing account
In some cases, the lender requires you to use an escrow account and charges you a one-time set-up fee to boot. But often you are given an option and if you are given the option, I suggest you opt out in the interest of maximizing the power of your dollars! Have the discipline to save this money yourself, put it in an interest-bearing account, and then you’ll have some extra dough left over to ease the pain of your tax bill.
Since I had neglected to do that on my recent refinance, I had to request to opt-out after the loan had closed by sending an actual fax. So old school! (Incidentally I do this with an iPad app called iFax. Comes in handy from time to time.)
Thankfully I really like our lender and they were super cool about this request. They dissolved the escrow account within a week and sent me a refund for the money they had been holding in there. My insurance agent was shocked that they were so breezy about it.
“If you were with Wells Fargo or one of the other big banks, I doubt they would have let you do that,” she said. “It’s getting increasingly hard to get the banks to give up a single penny because interest rates are so low and they are not making enough money on their loans.”
She makes a point!
She cautioned me that when that tax and insurance bills shows up, I should pay them pronto because if the bank gets an opportunity to pay it, they’ll jump at the chance to escrow me up again. Not sure if that is true but okay.
What about convenience?
I grant you, an escrow account is convenient. If you have not saved enough in taxes and you get that ugly bill in the mail, it puts a world of hurt on. And your property tax bill isn’t something you can affect very much, other than arguing with the city about your home’s value. For the most part, the government digs its heels in and makes you pay what they demand. Same with insurance bill. The cost is the cost and it is usually a high cost for homeowners.
If you really think you need to be forced to save this money inside of an escrow account, I applaud you for knowing the extent of your willpower. But if you are trying to play the smartest you possibly can with every dollar you spend, you already know the logical choice.
One last note of caution: Your lender does not know for sure how much your taxes and insurance for the next year will be. The city assesses tax values annually and your insurance rate can change too. Your lender estimates this amount and then pads the number in the escrow. They are required to disclose this to you. Look for this in your statements and make sure they are not holding too much of YOUR money.
Okay I’m done on this subject. Would love to hear what any experienced lenders have to say about this! You know how to respond so do so!