Escrow Account?? Or not??? What do you think?

lovins41208May 13, 2009

We are currently in the process of making our decision on the builder and the pricing, etc. I was wondering, which do you recommend... Only have a loan for principal and interest payment or have an escrow account for your property taxes and homeowners insurance added to the amount of the monthly loan payment? Have not clue, so any comment would help.


Thank you for reporting this comment. Undo

Most lenders require an escrow account for these items.

    Bookmark   May 14, 2009 at 11:44AM
Thank you for reporting this comment. Undo

Some do require it, and I am sure that is going to increase with the issues the industry has had lately.

Generally you will get a lower interest rate by 1/8 if you escrow. Over the course of the loan, this adds up. Many people claim they want the interest on the money, but interest rates are abysmal. If you want to be very specific about the money and the true financial outcome, you'd have to figure the break even point (if there even is one!) and decide from there.

    Bookmark   May 14, 2009 at 1:07PM
Thank you for reporting this comment. Undo

I haven't escrowed money on any mortgage in over 20 years and I haven't paid 1/8 point for the privilege either. To answer the OP's question: there is absolutely no reason to pay anything other than principal & interest through your mortgage unless you are afraid that you aren't responsible enough to pay the taxes and insurance on your own.

    Bookmark   May 14, 2009 at 1:41PM
Thank you for reporting this comment. Undo

Clearly, your experience was different and there are banks out there that do not charge, but it isn't uncommon, either. I have worked at 2 very large international banks, at one I was in the mortgage department, and I also have a close relative who was a broker...and it is definitely something to find out and could be a consideration for some.

    Bookmark   May 14, 2009 at 6:57PM
Thank you for reporting this comment. Undo
tishtoshnm Zone 6/NM

We preferred not to escrow. If you decide to change your insurance company it is easier to do it without having to go through the escrow. On our first home, the bank never got the withholdings right (taxes were constant and the insurance nearly so) so our payment fluctuated every year to make up for the deficit or for the excess funds accumulated.

When we bought this house we did have to pay $250 in additional closing costs to not escrow. Our broker said that this covered the administrative costs for them to make sure that insurance and taxes were taken care of. Now we are in the process of refinancing and are not sure what options will be available to us but if allowed, we will not escrow. I have heard that many banks require you to escrow if you have less than 20% equity.

    Bookmark   May 14, 2009 at 9:37PM
Thank you for reporting this comment. Undo

christine: "Clearly, your experience was different and there are banks out there that do not charge, but it isn't uncommon, either"

That is absolutely correct. However, your earlier statement did not include that qualifier and simply stated as a universal fact that "(g)enerally you will get a lower interest rate by 1/8 if you escrow."

    Bookmark   May 15, 2009 at 9:36AM
Thank you for reporting this comment. Undo

I agree with tishtoshnm. It was a pain to have our payment change every year because the bank kept revising it's estimate on how much we had to have in escrow. They had underestimated one year and sent a letter that we needed to have X amount of money to cover the shortfall and the anticipated increased amount or our payment was going to go up significantly.

For our current house we do not escrow although as someone said we did have to have 20% equity for it to be an option. I do my own escrowing and every month at the same time I send the mortgage payment I write another check and send it to my saving to cover the taxes and insurance (based on my estimate of course) when they come due. It also leaves me the flexibilty that if we are having a REALLY tight month I can choose not write my escrow check or to only bank half of the amount. I, of course, try to make it up the next month (or next paycheck) because I don't want to end up short at tax time. You just have to be very disiplined. To me it's worth it to not have a 3rd party involved.

    Bookmark   May 15, 2009 at 10:17AM
Thank you for reporting this comment. Undo

Madman - I have no idea how common your experience is. My general experience has been that they charge more, hence the use of the word generally.

As for the banks revising it and how much they keep, there are regulations about that. They can keep 2 months worth above and beyond the contributions leading up to a payment. Essentially, the day after they pay the bill they should have 2 months worth of escrow still in the account. They are only legally allowed to run an escrow analysis once a year. This is where they tell you if your escrow is up to date and if you will be short at any point. Most banks will either ask you to increase your payment so the shortage builds up over time or to make a one time payment to make up the shortage. These are adjustments due to increased taxes and insurance, etc...

I have never felt my increase was unfair or miscalculated, but I hear many complain about it, so some banks must not have very good escrow analysis programs. And while the bank can only run it once a year legally, as a customer you can request one at any time to see where you stand.

    Bookmark   May 15, 2009 at 1:51PM
Thank you for reporting this comment. Undo

We typically chooose not to do escrow with the mortgage. When we recently refinanced, our top choice lender wanted to charge us $150 to waive the escrow account. I asked them to waive the fee and they did. I have a separate savings account and each month I just deposit what I need to cover the taxes and insurance. I also include other annual/semi-annual expenses like auto and life insurance just because it makes my entire budgeting process a little easier. Right now I'm not earning much interest at all on this savings account, but hopefully that won't be the case forever.

    Bookmark   May 15, 2009 at 1:58PM
Thank you for reporting this comment. Undo

If the other parts of the deal can be set up precisely the same, why not simply pay the taxes and insurance yourself (assuming that you have the self-discipline to set some money aside from each paycheque to cover those expenses as they arise ... and if you lack such self-discipline, you should be taken to the woodshed for a "tuning up", as Dad used to call it ... the application of a strap around the legs a few times, to smarten you up a bit).

Or maybe your parents should be ... for not having taught you how to use money wisely as you grew up.

That suggestion's somewhat unfair ... as not many kids get involved with setting up mortgages, during their adolescnce. But the issue to which I referred was whether you can plan ahead far enough to make provision to cover payments that fall due occasionally, before the crucial day, so that you can take care of them without chewing fingernails.

Most folks need 3-months' income (or, better, 6 months' or up to a year's worth), as a cushion in case of emergencies rearing their ugly heads.

If the bank is collecting money for the taxes and insurance and paying them, they're not going to do it for free. So why pay them for doing a simple task that you can take care of yourself?

That's if the all of the other terms of the mortgge can be set up the same, which ever route you follow.

I don't like mortgage insurance, for the amount decreases over time to cover just the remainder of the mortgage, but the price stays constant. Better get life (and possibly disability, about 4 times as probable) which will likely not cost more, and the payout amount remains constant, enough to pay off the original amount of the mortgage, but as the amount remaining owing decreases, there'll be enough to pay off the remainder owing on the mortgage, and leave some for other purposes.

Not only that ... you're the owner of the policy, and you get the money, instead of the bank being the owner and they getting the money. That gives you the flexibility to use the proceeds as you see fit.

Good wishes for setting up a plan that you are happy with, over time.

ole joyful

    Bookmark   May 16, 2009 at 12:02AM
Thank you for reporting this comment. Undo

Joyful - Like I posted previously - in my experience you get a lower rate if you escrow. Banks don't charge for it because if they do escrow and pay the bills, they have a guarantee it will get paid and lower their liability on the property. It is to the bank's advantage to do that if for no other reason (never mind earning money on your money).

Also, mortgage insurance generally isn't optional if you have less than 20% equity. I think you are speaking of another product, though. The ones they sell with scare tactics of the "Who will pay your bills if you die or become disabled?" variety. And you're probably right - life or disability insurance is a better bet for your money.

    Bookmark   May 18, 2009 at 4:14PM
Thank you for reporting this comment. Undo

Personally I prefer to pay the property taxes and ins myself. Back when we did have an escrow account, the payment would be adjusted annually. Since I handle the insurance, I can keep an eye on the premium and shop around if they raise it too much. The mortgage payment is fixed. Early in the year I get my tax statement and year to year it doesn't change a whole lot.
And while the amount of interest is puny, I do get the interest on the money that I set aside for the taxes and ins.
It might be more convenient for some to have an escrow account - but I prefer not to.

    Bookmark   May 18, 2009 at 6:32PM
Thank you for reporting this comment. Undo

When we refinanced our house earlier this year, I was told (by a large institution) that, if you choose not to have an impound account, it will raise the interest rate by 1/4 point as a general rule. I don't know if that is the current trend versus the 1/8 point already discussed.

It turned out, however, that we have a high equity stake in the house, so were given the option of not having an escrow account, but getting the same low rate. We chose to go that direction because, like someone already mentioned, the ever adjusting payment from year to year has always been a bit of an annoyance.

In a nutshell, if you can get the same low rate without an impound account, do that- providing you are good at setting money aside and not living paycheck to paycheck. If you can't get the lowest possible rate available to you without an impound account, remember that it all comes out the same in the end.

    Bookmark   May 26, 2009 at 10:35AM
Thank you for reporting this comment. Undo

If you do decide to have an impound account, be sure to watch it carefully. Many banks/lending institutions have been known to "require" a higher impound balance than the local laws allow.

Worse, though, is that is it not uncommon for a bank or lending instituion to somehow "overlook" making the property tax or insurance payment in a timely manner, or directing the payment to the wrong account. In those instances, even though you have the impound account, the responsibility to ensure the payment is made timely is still YOURS.

    Bookmark   June 3, 2009 at 5:00AM
Thank you for reporting this comment. Undo

Well, I must be the only one who likes having these payment escrowed. I have to pay them anyway and it costs me no money or time to do it, so it's a win in my book.

I have an account in Quicken to track how much is in escrow and to track what's paid (and remind me if they miss it, which has never happened through several lenders).

    Bookmark   June 3, 2009 at 8:45AM
Thank you for reporting this comment. Undo

We don't have mortgage insurance. It's a ripoff. Pay off any mortgage from life insurance proceeds...

Hubs pays the homeowner's insurance in one lump sum each year. I pay the property taxes. I have an automatic transfer set up for money to be transferred from my checking account to a specific savings account on the 5th of each month. Twice a year when the property taxes are due, I use the online bill pay feature to make the payment.

    Bookmark   June 3, 2009 at 10:18PM
Thank you for reporting this comment. Undo

If you are responsible with money and the finance company will allow it, it is absolutely in your best interest NOT to escrow taxes and insurance.

Basically, you are giving the bank and interest free loan if you let them escrow. You will be better off just putting that money aside in a savings account or money market each month and earning interest on it.

Of course, this assumes you are responsible enough to set that money aside each month and not spend it. If having a couple thousand dollars in an account is going to burn a hole in your pocket, then you are better off paying each month and losing out on the interest.

    Bookmark   July 10, 2009 at 2:40PM
Thank you for reporting this comment. Undo

Interesting blog. I've had my mortgage for almost 3 years ~ my lender just told me Escrow is optional ~ I am no where near 20% equity ~ I'm disciplined enough to save, but flaky enough to miss paying taxes and insurance. However, I just opened an AMEX savings accout ~ .9% interest. WIth that, I'll save about $220 with no Escrow account. That should prompt me to remember to pay what I need to pay !

    Bookmark   February 23, 2012 at 12:33AM
Sign Up to comment
More Discussions
Spending Breakdown
My wife and I have tracked our spending over the last...
Experience as a 1-car couple?
We moved into a new home (my first real house with...
Family Banking Concept, anyone heard of it?
I did a search here and did not see any similiar thread....
Programmable Thermostat proof
Does anyone have hard copy proof of the savings that...
Is a lien only for money owed or.........
My Home Owners Association has rules of course and...
© 2015 Houzz Inc. Houzz® The new way to design your home™