Profile picture for James1029

Should I use escrow or do it myself?

With my mortgage we have the option of having an escrow account and the bank will pay our home owners insurance and taxes or should we put the money aside each month ourselves in a savings account and pay them ourselves.  Leaning towards paying them ourselves because it would lower our closing costs and we are disciplined enough to put the money aside and not spend it on something else.
  • April 06 2011 - US
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Answers (8)

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Profile picture for sunnyview
I would put money aside each month for the taxes and insurance as long as you are responsible enough to pay them yourself on time. Banks are notorious for making mistakes with escrow accounts. They often under calculate the amount needed and then demand that you make up the difference immediately. Also, if you refinance in the future your escrow funds can get delayed so you have to double pay waiting for your refund/adjustment from your last bank.

If you can pay them yourself, I would. Many banks will not allow you to cancel escrow if your loan starts out with it so you should not count on that either. Some banks do give a discount on your rate upfront if you agree to have an escrow account, others don't. Look at all the specifics then decide what is best for you.
  • April 06 2011
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Profile picture for NorthpointeBank
It all depends on how much you pay for taxes and insurance each year relative to the size of the loan. Unless you have a significant bill it will take a long time for the interest you earn on those funds to cover the .25 point cost of waiving escrow. Particularly if savings rates remain this loan. Also some lenders are able to waive escrow on the homeowners insurance without having a cost. I find this very beneficial to my clients in low tax areas ( especially those in low tax high insurance areas) as you get half of the benefit of waiving escrow but none of the cost.

My own rule of thumb ( all though not mathematically back  tested or anything ) Is that if your loan is $200k or under and you have to escrow bills over $5k you should think about waiving escrow)

However for your situation it sounds like the decision is more based about the money due at closing which is fine, but shouldn't be the basis of your decision as you should be setting aside a similar amount if you choose to waive escrow. It should be about the math ultimately.
  • April 08 2011
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Because you have the discipline to save for taxes and insurance, I have always recommended that borrowers manages their own taxes and insurance.  Over the decades I have had customers affected by bad situations with escrow holding accounts.  Most of the time escrow accounts work out just fine, but not always.  Escrow refund checks have bounced, tax payments from bankrupt lenders bounced leaving the burden on the borrower, loan sales and transfers sometimes it is lost, etc.  These problems do exist, and eventually get straightened out however it is not a fun process to go thru. 
Here is an example:  I got a notice from my town that my tax bill was not paid and they have added a $400+ penalty. I have a escrow disclosure statement that BofA sent me last month....
If the lender allows you to take control, it is always my recommendation unless the borrower tells me that they would not be able to manage it on their own fearing they do not have the discipline.  You are responsible to make sure that the payments are made, and made on time.  It is difficult when someone else has control of that money, so be responsible, take control, and then you can make it happen.

  • April 08 2011
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Profile picture for sunnyview
Thank you for the best answer. I appreciate it and happy Friday! :)
  • April 08 2011
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Not escrowing will not reduce closing costs because they are pre paid items.  It may reduce cash to close or loan size.  Depending on the loan to value, there may be a .25 price adjustment for not escrowing.

My advice, go with your instinct because it's always right.
  • April 06 2011
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Profile picture for DanGoodfellow
It's great when it works the way it's supposed to, and as I see mentioned-- reduces a couple bill payments for you.  The Escrow can and will likely be larger than the bills you need to pay.  Banks are only able to hold a small percentage greater than the amount needed.  But the checks and balance process seems to only take place once a year.  It is at that point that excess funds collected must be refunded to the mortgagee.  It was at this point I realized-- this is cheating me of potential interest that could have been earned while saving this money in my own account until the date it is due.  Think of the interest earned as a discount you're giving yourself for handling your own funds. 
  • April 06 2011
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I agree with Krishna.  With interest rates so low, you would make so little interest on a deposit account or a CD such that it doesn't outweigh the convenience of having your lender handle the escrow.  That said, if you change your mind at some point later in time.

  • April 06 2011
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Unless you stand to lose a substantial amount of money from interest I would just escrow the payments to make things easier. Look at it this way, It's two less bill each year you have to worry about getting in on time.  With escrow the mortgage company will get the tax and insurance bills and pay them on time.

Krishna Perkins

  • April 06 2011
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