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Managing Your Own Mortgage Escrow

That One Caveman recently took on the task of managing his home mortgage’s tax and insurance payments [3], 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?