What is an escrow?
An escrow is when you include your taxes and insurance with your monthly mortgage payment.
How does Escrow work ?
- Buyer, seller and the Escrow Agent sign the escrow agreement.
- Buyer deposits money and/or documents in escrow.
- The Escrow Agent manages the escrow account.
- The Escrow Agent confirms to the seller that the escrow amount and/or documents have been received in the escrow account.
- Seller performs the required services.
- Buyer accepts delivery and proof of acceptance is sent to The Escrow Agent .
- The Escrow Agent releases the money and/or documents in escrow.
Now here's my situation. I'm in the process of finalizing my mortgage for buying my first home. (I have to make a decision by the end of this month). I got Good Faith Estimates from a number of lenders and all of them had $2000 - $2500 going towards the escrow account. so I assumed thats how it has to be. But then during a conversation with one mortgage broker, he asked me if I wanted to escrow my taxes and insurance. I then asked him if that will help me get a better rate or if there are any other advantages to an escrow account. He said that if I don't escrow the lender sometimes charges a quarter point. But I have checked this and most big banks and lenders don't really care either way. So I negotiated with the broker and he said that he is willing to "eat up" that quarter point.
So that got me thinking. Should you, or should you not, go for an escrow account?
The major advantage of a mortgage escrow is that the lender assumes responsibility for paying your property taxes and homeowners insurance. This is also the major disadvantage. In addition, with an escrow the lender gets to keep the interest on your account.
Many people don't want to get a big tax bill all at once. They prefer to pay a little bit every month and don't want the headache of paying it on time. Having said that, there have been cases where the lender failed to pay it on time causing an even bigger headache to the borrower.
So what will I do ? I'm going to pass on the escrow account. For control freaks like me, I like to be in charge of paying my dues on time and not lose any interest on my money. There are 2 big advantages I see by not escrowing. One I pay less at closing, and two, I pay less every month. Of course I'll get a big tax bill, but I think I can handle that.
Am I doing the right thing ?
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6 comments:
I like the convenience of having everything rolled together, but you got me thinking.
What if you set up your own escrow account, still make incremental payments to avoid getting one big bill and you will earn the interest from the account instead of the lender?
Scott, if you want to open a placeholder account for yourself thats fine. It doesn't have to be an escrow account with a 3rd party. Just open a money market account and start paying your taxes in there. Then when you get the tax bill, pay the whole thing off from that account. Hope this helps.
I've done it both ways, and it looks like you have a good handle on the pros and cons.
Not a big deal one way or the other, as long as you are able to pay the bill.
I worked for one of the more reputable mortgage companies back in 2003-2005. The company is one of the ones that is still around and is doing (relatively) well.
First of all, "So I negotiated with the broker and he said that he is willing to "eat up" that quarter point."
I did not get paid more if I set up an escrow account for a client. Therefore, there was no incentive for me to recommend for or recommend against getting escrow.
"The major advantage of a mortgage escrow is that the lender assumes responsibility for paying your property taxes and homeowners insurance. This is also the major disadvantage. In addition, with an escrow the lender gets to keep the interest on your account."
This is NOT the biggest hassle I've had with escrow. The interest accrued is small and in the scale of less than a hundred dollars and certainly worth the convenience.
The biggest headache I've had to deal with is during refinances or when client's monthly mortgage bill went up (because their escrow bill went up).
This is a typical scenario. Bob has a $2500 mortgage with $150 ($1800 annual payment) in taxes and $100 ($1200 annual payment) in insurance. His total monthly bill is $2750. For the sake of this discussion, Bob has a fixed 30yr mortgage.
In year 1, all is well. Bob makes 12 payments of $2750.
In year 2, his property taxes goes up because the property appreciated. His taxes are now $2000. But the escrow account isn't paid until the end of the year so he keeps paying $2750.
In year 3, the escrow account has paid out the full $2000 making his account short. Also the escrow account just realized the taxes is $2000 so it adjusts accordingly. Bob's monthly payment is now $2900. Bob calls me and gets really miffed at his $150 increase in payments.
I have found that it is far easier to let the client deal with the surprises about the taxes from their tax bills.
So in short, don't use escrow.
The lender doesn't keep the interest on the escrow account. It's credited to your account.
I recommend that you check out http://www.stopsittingonyourassets.com --- I go there to have my mortgage questions answered. Hope this helps.
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