Homeownership and Escrow

So Mr. Jar and I bought a condo in June. When we set up the mortgage payments we were asked if we wanted to put an amount of money each month into escrow, to pay for the property taxes (which we don’t pay until 2005 because of the developer or some such stuff that I don’t get).

Anyway, we declined, as it would raise our payment each month. In a random poll of our fellow condomites, we find EVERYONE has escrow, even as little as 10 bucks a month (we were told it should be about $100).

But then you ask the older generation (moms, dads, grandfathers with stern looks) and they say “if you know how to budget your money, there’s no need for escrow”

So what’s the scoop. Besides just the ‘out of sight out of mind’ factor of putting it away where we can’t get it, is there any other advantage to doing this?

I don’t recall escrow being a choice on our mortgage - you wanted the mortgage, an escrow account was part of the deal. The bank doesn’t want anyone getting in arrears on property taxes for a house that technically belongs to them.

If you do have a choice, I’m not sure there’s any big advantages - if you put the money away yourself, you could probably get a better interest rate on it - but the ‘out of sight out of mind’ aspect can be useful for those whose cash burns a hole in their pocket. The first year we had our current house, the bank put away a little too much and sent us a check for the excess at the end of the year and adjusted our escrow rate. That was kind of nice.

An escrow arrangement was automatically set up for me. When I asked what it was for (I’m not American - I’d never heard of these escrow things) and if I had to have it, I was told that I did not need it if my mortgage was for less than a certain percentage of the value. I think it was 75% As my mortgage was indeed for less than that, I canceled the escrow. I didn’t see any reason to give the bank an interest-free loan. I am perfectly capable of budgeting for the payments myself.

I opted for escrow mostly for the bother issue.
(My escrow also includes insurance)

It is even better since I have automatic payments. I might lose some interest but I’m gaining not having to use stamps, remembering to pay, etc.


I agree. There’s no reason to choose an escrow unless you need it as a method of forced budgeting. (Essentially, it’s the same choice that you face when your tax withholding is set too high. Some people lower it to get the immediate $$$, while others like the forced savings/large refund check.)

I currently pay property taxes on a piece of land that I intend to build a house on. I will jump at the chance for an escrow account when I finally do. The taxes are unbelievably annoying, IMO–I pay a hug chunk of money in September (school taxes), then another huge chunk in January (Town property taxes). I would much rather pay a consistent, smaller sum each month.

Of course, it’s not really a HUGE problem to pay it all at once (or at twice, in this situation). But then, neither would it be a huge problem to pay all my insurance premiums one time per year (I pay monthly), I suppose. Herre’s a question: Would you pay all of your mortgage payments for the year in one big chunk in January, if the bank permitted it? Why or why not?

One POSSIBLE advantage is if the mortgage company fouled up in paying or missing a tax or insurance payment that results in harm, you MIGHT be able to hold the company responsible.

For many years I worked at an S&L and we generally paid the insurance premiums on customers mortgages. It was always a big concern we kept track of payments because of potential liability. We also paid taxes and a few times messed up – we always paid any additional fees in those cases.

As long as the return on your investment is greater than your mortgage rate by a few percentage points, then the answer is yes – I’d pay my mortgage once a year.

I ran this scenario in a spreadsheet I quickly created, with these assumptions*:

  • mortgage amount $50,000
  • monthly payment amount $700
  • half the monthly payment is applied to the principle
  • mortgage rate is 5 percent
  • investment return is 8 percent

Over the course of two years, paying monthly:

  • mortgage interest paid $4,562

Over the course of two years, paying once a year:

  • mortgage interest paid $4,790
  • investment return $728

The reason you’d pay less mortgage interest by paying monthly is because you reduce the principle on which you are charged interest monthly.
[size=1](* I recognize that all these calculations are grossly inaccurate because of the way mortgage payments are calculated. I didn’t use complex formulas, I just did some rough straight line calculations. This also assumes you’d invest the monthly mortgage money wisely. In other words, this example is for illustrative purposes only. Is that a good enough disclaimer?)

Also, for illustrative purposes, is the crappy vB coding.

That highlights one of the main reasons why I did NOT want an escrow account. The property tax is something that I owe the government. I am comfortable with taking on the responsibility to pay my own bill. I did NOT want to introduce a third-party intermediary that might screw things up.

If I get to pay in arrears, yes, because it gives me free use of the money for a year. Even my insurance, which is in advance, I pay in two 6-monthly payments as that seemed like the best value. Monthly payments involved an additional administration fee and annual meant paying the whole thing in advance, so I took the option of a single $6 fee to pay in two installments instead of once.

My Mother does this for the insurance on her farms. And the insurance company gives her a discount for doing it this way.

I opt for paying the taxes myself without escrow. In these days of mortgages being assigned and re-assigned between lenders, and of lenders constantly merging with each other, I don’t quite trust them to keep track of my escrowed money to pay my taxes for me. I’ll do it myself, thanks.

When we first bought our house, we were required to have an escrow account, from which the mortgage company paid the property taxes and homeowners insurance. One of the times we refinanced, the new mortgage company did not require an escrow account. What I did then was set up my own “escrow account” by opening a money market account and arranging for deposit of an amount equal to slightly more than one-twelve of the combined amount of my property tax and insurance. When my taxes and insurance go up, I increase the amount that gets deposited accordingly. Having a separate account keeps me from having to remember to set aside money when the payments are coming due. Plus, the interest rate is a little better than I get from my checking account. Occasionally I tap into the excess that accumulates and either use it for home improvements or transfer it into my retirement account.

Don’t do escrow unless forced to. Why should the bank get to hold onto your money for free? The times we had to, we never got any interest on it. Even if it’s 2 cents, multiply that by the number of mortgages the bank carries, and it’s a tidy sum all together.

We had escrow, then when we refinanced, we got rid of it. I was nervous about forgetting to pay our property taxes, but late property taxes are actually nothing to worry about. It’s not like it’s going to go on your credit record or anything. The only drawback is the distress caused when you realize the taxes are due. It’s much better to spread out the pain in regular doses, IMO.

I have an escrow, but the sum is piddly so I don’t worry about it – my taxes are a super-super-super bargain at $1400/year (and with good schools and city services!), and insurance is cheap since I’m in the good suburbs rather than the nasty city.

So the convenience is easily worth the few bucks I lose in saving it myself.

Forgive me, I really am VERY ignorant on these things so I have a few more questions. And remember, talk slow to me…I’m just a caveman.

So if I DO have an escrow account, the mortgage company takes care of the bill for me? I never have to GO TO the escrow account, withdraw and pay taxes…it’s all done through them?

If I don’t, will I recieve a tax bill in the mail or is it just something I have to intuitively know?

(Surprisingly enough, I take care of all the money in my house. Now that we’re owners I don’t want to screw us up.)

It’s been so long since I’ve had an escrow account that my memory is a little fuzzy.

IIRC the city sent us the tax bill, and the mortgage company sent us a check with the year’s escrow. We still had to physically pay the property tax ourselves. The mortgage company didn’t do this for us.

I’m surprised by some of the posters in this thread saying that their city sends the tax bill to the mortgage lender and everything is taken care of without homeowner intervention. I can’t imagine my city government trying to keep track of where everyone has their mortgage.

That’s the way it works for me. My taxes and homeowner’s insurance are automatically paid from my escrow. I get notices showing how much was paid. The convenience value far outweighs the miniscule lost interest.