My wife and I are about to buy a house. We were thinking of getting a mortgage escrow waiver so that we do not need to put away taxes on a monthly basis. Obviously, the taxes will be paid, but we figured it might be better to have that money to invest during the intervening period. We plan to stay in our future house for a while, and taxes will likely be 500-700/month. The waiver has a one-time cost of 25 points (roughly $1400). Does it make sense to do this?
How long would it take for you to get $1400 in interest off your investment of the funds-otherwise-sent-to-escrow?
How much interest could you earn investing the $1400 instead?
You would be putting the money into the escrow account only a few months before they become payable. What sort of return are you going to get on that money which is worth paying $1,400 for the waiver?
That sounds like a whole lot of work and upfront expense for very little gain. Assuming taxes need to be paid quarterly, you are only going to have 3 * $700 = $2100 in the account at each peak. You will average on half that for the average daily balance during the quarter. It needs to be in safe and liquid investment vehicles because it is a tax bill after all. You have to be able to get it out and you don’t want to lose much of it. Those types of investments pay very, very little today. Even a 1% return is being generous on things like money market accounts that you should use to keep tax money in. Even assumming you can eventually get better returns of 2 - 4% when the market gets better, it would take you forever or close enough to it to make your $1400 back to set it up to begin with.
My vote is no. Fairly large upfront cost + and very little long-term upside + hassle and risk = bad idea.
The taxes are paid annually, and the fee is a one-time fee. So it’s theoretically, $1400 over 30 years that we’d have to earn to break even. Ideally, we would like to stay in the house 10+ years at least. I know the option is not going to be a huge money saver, but it would be nice to have control over the money. Was wondering what people thought.
Since when did they start charging a fee to waive the escrow? I thought market practice was, if you put at least 20% down there was no escrow requirement. If you are putting 20% down, tell them to go to hell, that you will pay your own taxes and hazard insurance. They should be able to only require that you show proof that those items are paid, not that you give them the money to hold and pay on your behalf.
These things are negotiable.
You may make some small amount of money over 30 years if you put this is really safe and liquid investments that pay above 2% annually but those don’t exist right now and probably won’t for a few more years at least so you can tack on some extra years to make back the $1400 right off the bat. However, there are a few different types of risk in doing this. One is that something will go wrong with your tax money and run incur a fine or legal problems that wipe out years worth of gains off your strategy just due to one simple mistake. Normally the bank is responsible for making sure those payments get paid correctly and documenting it but you want sign up for that duty yourself for some reason.
I am not sure what you mean about 'having control over the money" means. That isn’t really true. It is tax money which is a non-negotiable expense and has to be treated as a pure bill. You can’t take that money to the horse track or bet it on the newest tech stock IPO. The best you can do is put it in an account that pays a small amount of interest. If you want to invest more aggressively, that is fine but you shouldn’t do it with your tax money. You can put more money aside for investing to do what you want with.
Apparently times have changed. At least in our case, you can ONLY pay to waive it if you have 20% down. But I agree, it’s probably negotiable.
I am not worried about problems paying.
If someone said you can either pay a bill now, or next year, it makes more sense to wait so long as there is no outside issues, or fees. Obviously, there is a fee in this case, but I am not sure where the break even point should be to make it worth it. We are pretty responsible, so I don’t anticipate not having the money for a tax bill even if we lost some money through aggressive investments.
Sure, I could bet it all at the horse track. Of course, I won’t do that, but the point is I would have the prerogative to if I wanted. This site here indicates that the break even point for us is roughly 6 years at a 2.5% interest rate. Didn’t check the math yet though.
Don’t people make interest on their escrow account anyway? I think I got a INT 1099 this year from my account.
I see nothing but problems from this, what happens if you can’t make your tax payment for whatever reason? I really see no upside besides a few bucks.
When I bought my house in 2008 I was putting substantially more than 20% down and was told that I still had to have an escrow account unless I paid a fee to have it waived (although IIRC correctly it was under $500). The mortgage broker also told me, however, that if I waited a few months after the closing I could call Wells Fargo and request that the escrow be stopped and they would send me the money in the account. So I did, and they did, and I used the check to open a separate savings account into which I now make a monthly deposit to cover the annual taxes and insurance.
I don’t know, if people were computers, it will probably work out to some small amount of gain for you over a long period of time. It seems like a lot of work and hassle to me for so little and there is the possibility of it becoming no gain because of a mistake that you have to fight over yourself. I always get confused when people bring these types of accounting scenarios up. It may work but the gain is so small that you would be better off investing your time where it would make even more and not have to pay up front.
Why don’t you just run the numbers for taking that $1400 and putting it in a blue chip stock now or just an index fund? It would almost always beat what you are proposing. There aren’t any safe 2.5% interest bets right now in the liquid market like you used in your example and may not be for quite some time. If you say there are, I need you to show me because I can’t find anywhere close to half of that.
Speaking as a newish homeowner, there are few better feelings than getting a bit fat check because your escrow requirement went down for the year.
I agree with this.
brickbacon, you are in house-buying and -financing mode, so you are thinking about your life over the next few years and trying to optimize each little aspect of it. Which is a perfectly fine thing to do. But sometimes that desire to optimize can turn ugly on you and lead you down the path of over-optimization, where you think it’s a good idea to go through a lot of pain for very little gain just so you can get another plus sign in a different column over the next 10 to 30 years. But the present value of even the rosiest scenario here is about the difference between eating out and cooking yourself a couple of times.
Believe me, I’ve been there myself. In a couple of weeks you’ll probably forget all about it.
We chose to waive (though good grief, we didn’t have to pay a fee, what kind of crap is that?) for exactly the reason you cite: to have control over it. Our mortgage officer told us to as well if we thought we were going to be responsible about paying – apparently he had seen one case where something went screwy with the escrow account not paying the tax bill and it was a nightmare to resolve.
Though I imagine such cases are very rare.