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Managing Your Own Mortgage Escrow

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That One Caveman recently took on the task of managing his home mortgage’s tax and insurance payments, essentially replicated the services of his lender’s escrow account, because of a very favorable appraisal. The appraisal raised the listed value of his home by $15,000, lowered his debt to value ratio to 80.4%, and thus enabled him to manage the funds himself (80% appears to be the sweet spot for this).

I thought about doing this myself but scrapped the idea for two big reasons. The first, the profits are small. I do the math for Caveman’s situation, a max $5500 escrow, but my escrow is lower at around $3500; so I would’ve earned even less than the analysis below. Secondly, while I trust my diligence, stuff happens and the risks are too great.

Profits Are Small

Caveman said his escrow maxes out at around $5500. If we assume monthly payments of $458.33 and a single $5500 payout at the end of the twelve months, 3% interest (or 0.25% each month, if compounded monthly) earns you $76.26 total. That $76.26 will appear on your 1099-INT and taxed at your marginal tax rate. If you are in the 25% tax bracket, that’s $57.19 in your pocket. If your escrow pays out twice a year, your earnings are even less ($57.61 pre-tax, 43.20 after taxes in the 25% bracket).

In return for $57.19, you have to send out payments to the county or state for property taxes and make payments to your homeowner’s insurance provider. That’s a lot of headache for a relatively small payoff.

Mistakes Are Costly

If you miss your tax payments, you start accruing penalties that eat into that small gain you would otherwise pocketing. In the worst possible case, the county puts a tax lien on your home, someone purchases it, and you fail to respond to the mailings for the entire tax lien holding period. Then you lose the house. The odds of losing your home are pretty slim, but they are greater than zero. Perhaps you move out in 5 years, start renting out your home, and forget to change addresses on record. Perhaps you go on vacation and forget to schedule a payment.

I’m always a fan of optimizing your personal finances. This is a case of where you can definitely squeeze a little more out of your money if you are diligent and put safeguards in place, but it simply wasn’t one I was willing to try given the small upside (recall, our escrow is max at around $3500, so we would’ve earned far less).

Do you manage your own escrow?

{ 9 comments, please add your thoughts now! }

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9 Responses to “Managing Your Own Mortgage Escrow”

  1. fred@opc says:

    Perhaps I’m missing something here, but my lender actually pays me interest on my escrow (and I thought this was required by law, perhaps it is a state-by-state thing). I get an interest payout once per year in December based on the average daily balance in escrow. The payout isn’t much (and honestly, I’m not sure of the interest rate, but I’m positive its > 1%) … Seems like the other route is a real pain in the neck for very little gain.

  2. F2O says:

    I hold my own because that’s what I have always done. When I bought my place, I paid cash and then took out a HELOC to fund the repairs (it was fixer and I didn’t even move in for 9 months). Then when I refied into the 30 year fixed, I never bothered to include my taxes and insurance since I had become used to paying it on my own and I had about 50% equity. Now I have over 80% equity and thought about changing last year, but it seemed to be a waste to do so since it would impact the cash flow to which I have become accustomed.

  3. Traciatim says:

    I ended up paying for my taxes and insurance myself only by fluke. I think it may be different in Canada since my insurance was always gone separately. However my taxes I checked the little box to have my mortgage company deal with it, but when my payments came out I realized right away something was off. Instead of calling I just get a bill each year in the mail for my taxes and I can do an online bill payment for my tax bill one a year.

    So, an automatic savings plan through ING, one transfer and a bill pay once a year for > 50 bucks in my pocket? Sure thing. My insurance is just an auto-payment too.

    Now if I was stunned and wasn’t paying attention to the mortgage payments I would have been in a whole heap of trouble come tax time. I wonder how many people that’s happened to.

  4. That One Caveman says:

    Thanks for the commentary. I appreciate seeing the other view. You bring up a few things that I hadn’t considered (considering the long-term issues), but as long as I’m careful they shouldn’t be an issue.

  5. jen says:

    I just sent in the paperwork to manage my own! I don’t think it works for everyone, because you have to be disciplined and not tempted to spend that money. (I play with 0% balance transfers, so I enjoy having some more $ to earn interest on!)
    Also, I can pay with a credit card which gives us points and then again, gives me 30 more days at the end of the year to earn interest.
    If you are earning interest in your escrow, then I would leave it alone. I was not and while it’s not much interest over 1 year, in 20 years that’s a chunk of change you missed out on!

  6. Amy says:

    I elected to manage my own taxes and insurance when I bought my condo 11 years ago. I had gotten a nasty surprise on a prior house where I had to make up an escrow deficiency as well as make higher payments for the next years taxes/insurance. I have my taxes billed me to me quarterly so they’re very manageable as a normal bill. I used to self escrow monthly for the homeowners but I decided to charge the annual premium this year and get the credit card cash back.

  7. Tom says:

    First, lenders do not pay interest on escrow. By definition “escrow” is without interest on either side. Of course it’s commonly believed that lenders DO profit on the money they hold, but who knows.

    Second, it is quite possible for your lender to miss or be late on YOUR tax payment, and you will never know about it until you are contacted by the tax authority and charged a fine for not paying on time. Yes, if I miss a tax payment then I will pay a penalty as you say, but I would rather the onus be on me and at least know about the missed payment as opposed to relying on someone else who may be more forgetful than I. Besides, the tax bill comes in the mail twice a year, every year, at about the same time. If you “forget” to make that payment you likely have organizational and financial issues you need to deal with.

  8. Ed says:

    When I refinanced to a 15 year mortgage last year, I wasn’t even given the option to include taxes and insurance in my payment. My previous loan(s) always had them included. I never received interest payments on our escrow account.
    I am glad that they weren’t included this time. I have an auto deposit into my ING savings account and earn interest on it. It is actually a sub account that is specifically set up for taxes and insurance.
    My tax bill and insurance bill come once a year and are just like any other bill. Works good for me.

  9. Patrick says:

    I don’t manage my own for the same reasons you mentioned above. I’ve got too many other things to worry about for such a low level reward. I think my escrow is in the $3k-4k range. So I wouldn’t earn a lot by managing it myself.

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