Should You Manage Your Own Mortgage Escrow?

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I recently got a refund from my mortgage escrow servicer, as my property taxes decreased. This reminded me about how I always used to read that you should manage your own escrow account. I don’t think I have a choice about the matter right now, but I tried to research all the pros and cons below. Did I miss something? Share your own reasons in the comments, and don’t forget to vote in the poll below!

Escrow Definition and Background
When you borrow money to buy a house, the lender holds your house as collateral in case you stop paying them back. However, in certain cases the lender can lose control of their collateral. If nobody pays the city and/or county property taxes, the local government can seize the house and become the first lienholders on the property. Similarly, if the house burns down or becomes flooded without insurance, then they’ll be in trouble too. This is why most lenders require the funds for these types of charges to be automatically collected each month and placed in escrow, until the respective bills are actually due.

Now, most homeowners of course want to pay these things, but as with other big bills, many people may not plan ahead and later find themselves unable to pay. Some lenders may allow you to manage these things for yourself once you reach a certain amount of home equity (loan-to-value ratio) or if you pay them a fee or a higher interest rate.

The Real Estate Settlement Procedures Act (RESPA) provides several requirements regarding escrow. The maximum “cushion” a lender can accrue is for 1/6th of the total amount paid out, or approximately two months of escrow payments. While some states require interest to be paid on escrow account, RESPA does not.

Reasons To Manage Your Own Escrow

  • Earn interest. This is the reason I hear most often. You pay out a lot of money ahead of time, when you could be earning interest on those funds instead. Even if you don’t have it as as lump sum, you could tuck away 1/12th of your insurance and tax bills every month on your own.
  • Avoid payment errors. Even though the whole point of escrow is to pay your taxes and insurance on time, escrow servicing companies still make mistakes occasionally, resulting in lost payments and big headaches.
  • Increase tax deductions. If you think that you will be able to itemize deductions in one year and not the next on your tax return, you may try to “bunch” deductions so that they end up in the preferred year and save you some money. For example, you could pay your 2010 taxes in January 2010, and your 2011 taxes in December 2010, so they both occurred in 2010.

Reason Not To Manage Your Escrow

  • You have no choice. Many lenders, like the Federal Housing Administration (FHA), require escrow for the life of the loan. Others, like PenFed only allows you to manage your own escrow once you reach a 75% loan-to-value ratio. If you’re shopping for a new loan, this is a possible negotiable item.
  • It costs too much. Some lenders will let you waive escrow, but only for a flat fee (possibly hundreds of dollars) or a quarter to half point (0.25%-0.5% of your loan value). That could be end up being a bad financial trade-off, especially if you don’t keep your mortgage for very long.
  • Simplicity and convenience. Hey, it’s one less thing to worry about, and your monthly expenses stay more constant. Technically, if you are short on your escrow, the servicing company will even cover the difference for you and just make it up over the next year. You can view it as a service provided in exchange for any lost interest. If your annual taxes and insurance premiums total $1,500, that is $30 per year at 2% APY, which even assumes that you lose an entire year of interest. Of course, interest rates may rise later.


Do You Manage Your Own Mortgage Escrow?

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  1. If it doesn’t cost you anything extra in loan fees or rate, you should manage your own escrow, for the reasons you stated: more control over timing of the payments, less prone to errors. You are not going to lose much interest these days. That is really a non-issue. Some escrow accounts actually pay good interest, higher than what many online savings accounts pay.

  2. I manage my own escrow mostly to avoid payment errors. I would not do so however if there were an associated cost for the loan.

  3. Barbara Smith says

    I have never had escrow for either of the two houses I have owned in my life (including my current house!). Most banks do not like that I do not want to escrow my insurance and property taxes, but even if I had to pay a bit more in interest, it worked out for me the first time I bought a house because the escrow would have been THOUSANDS of dollars. I could not believe how much $$ they wanted me to pay to put in escrow. It was something like 1 year’s insurance and 2-3 months property taxes. It was a stretch for my first down payment, much less the cash grab the mortgage bank wanted.

    My insurance company lets me pay monthly and I pay property taxes twice a year.

  4. Why on earth would you have an escrow? I thought it was standard to do it all yourself at 20% down.

    You don’t exactly seem like you would have a problem coming up with your property taxes or paying your homeowners insurance. Heck, you always rate chase, and zero is the worst rate!

  5. I answered that I manage my own escrow (though not in an escrow account) but I really needed another option because for our home we don’t have escrow, but for my rental property, we do. There was no choice on the rental property, so I’ll live with that.

    The other benefit (though not much of one) is that I can pay my home owners insurance with a credit card and get the 1% back on that.

  6. I would prefer to manage my own. When I refinanced in 2009 and asked about this, the lender indicated that there was an option to do so but the loan would be a quarter percent higher. No way I could make that cost effective with the small amount I’d be making on interest.

  7. when i closed on my loan, way back in 2007, i was told, becaue i didnt have 20% down i had to have escrow. But that once the note was in place i could switch out.

    Seeing as my township collects taxes quarterly, i guessed that i would average having 1 payment of escrow in savings every month. I’m not that worried about chasing the interest on that. (approximately $15 over the course of an entire year at today’s interest rates)

  8. If you can handle paying your own bills, and I would guess that most people reading this blog can, then you should pay the bills yourself. On the other hand, if you think you need an escrow account, then you probably do.

  9. Voted yes. I don’t really see it as “managing my own escrow”. I just simply pay my bills.

    It seems a lot easier than having to deal with whether or not there is enough in the escrow account, etc.

  10. @Adam : Good Point.

  11. Banks shouldn’t even have a policy to force your payments into escrow! If they did their homework on buyers, they should only be qualifying those who CAN afford to pay their bills ON TIME on their own. Otherwise we wiill be in the financial mess all over again in the future.

  12. Steve Bonds says

    I had lots of payment problems on my property insurance before I took it back from my bank. They originally required me to have an escrow account, but after a couple years of headaches and hassles, they let me skip it. It’s been better for everyone this way.

  13. I have an escrow account because we were given a .25% reduction in our interest rate if we did it.

  14. Chris in Boston says

    I have felt the pain of escrow problems.

    Once for unexplained reasons the City of Boston returned a payment to GMAC. GMAC redeposited the money back to my escrow. Neither the city nor GMAC informed me of this event. However, within 6 months, the city decided to issue a lien on my property due to lack of payment.

    when I received the lien notice, I immediately called GMAC and they sent the extra payment for me to get current. However, a lien is a nasty thing to have on your credit report. That took me years to get rid of. Not to mention I had to pay an attorney to help get the lien removed from my credit report, and file an article of tax title redemption with the local registrar of deeds.

    Unfortunately since my refi last May to get to a 4.65% rate with BoA, I could not get such a low rate if I did my own escrow. So… I am still using BoA escrow services and hoping they do a better job.

    The City of Boston never could explain why my payment from GMAC was returned. It is also infuriating that they take no ownership of the problem which was caused by them returning the damned check to begin with!

  15. As soon as the lender allowed me, I began doing it myself for all reasons mentioned above, especially do to multiple lender errors. Since there was no interest in my former escrow account, the only benefit that I saw by letting the lender do it was the even monthly payments. It was easier to budget and monitor cash flow with an escrow account. But, that does not outweigh the benefit of DIY for a control freak like me. =]

  16. This was never even discussed with any lender or mortgage broker I’ve worked with.

    I’ve had an original loan of 80% with a 15% HELOC (2nd), refi’d 2 times and opened/refi’d a HELOC 2 times and have always paid my property taxes, HOA dues, and internal insurance on my own. I have heard of this before, but the mortgage brokers / Credit Union (HELOC) never offered/required it.

    I typically use a SmartyPig account to fund my property taxes with.

  17. Some states require interest to be paid on your escrow account. For example in California its 2%, which is not great but is better than most savings accounts right now. I don’t know how this differs in other states.
    I was forced to use an escrow account by my lender but since it is earning interest I can’t complain too much. Its does require keeping tabs on your lender and the county tax assessor.

  18. FredMertz says

    I’ve never had an escrow payment problem with Countrywide/BofA, and honestly don’t understand why anyone would want to deal with paying all the bills on their own. My escrow balance has run negative many times and the simply keep paying the bills until they eventually change the escrow percentage. I do, however get interest on the account, but it is marginal. I would much prefer not having to deal with paying the bills even if it meant not getting interest.

  19. I also live in Boston and pay taxes myself twice a year with credit card earning 2% cash back. This is in addition to interest saved by not having escrow. However, I do remember there was a slight difference in mortgage interest rate offered by my local broker when I was getting mortgage 5 years ago. I had to opt for having an escrow at loan origination time to get lower rate. Right after loan origination (within first month) I called mortgage servicing company and asked them to cancel escrow account and let me pay taxes myself. Somehow it worked. I guess they could not care less because they knew my mortgage was for sale and let it slip. In a month my local broker sold my mortgage to Countrywide, but by that time I already had control over my tax bills and Countrywide and now BoA never raised a question about escrow.

  20. What you are missing is how BAD the mortgage companies tend to screw up homeowners’ insurance and property taxes. One horror story is enough – but I have seen more than a few.

    To add to the matter, a relative paid off an escrowed mortgage and didn’t think about the escrow. I am not sure what happened with their property taxes,but their insurer dropped them without ever trying to contact them (non-payment). They didn’t realize until they were sued. I am quite sure most people don’t think about it when they pay off their mortgage. An extreme example, but makes a point. These are very financially savvy people who weren’t paying any attention to their insurance. You shouldn’t just turn off your brain because someone else is handling it.

    Anyway, I have found lenders want you to escrow. I have bought and refied numerous times and always have to ask 10 times not to have escrow, and then cross it out when we sign. I was shocked during our last refi when a broker friend actually took the escrow out of the paperwork. Was a nice change. IT has never cost more or been an issue, otherwise. We did put over 20% down on our homes.

  21. enonymous says

    I earn more interest on my escrow account than I do in the savings account where I keep my liquid funds, due to a quirk in CA laws.

    That said, I still prefer to manage my own, but I made one mistake, just once paying my tax bill late (the envelope was ready to go and had the check written two months in advance, but the envelope got buried in a pile of papers). It cost me $500.

    Pennywise, pound foolish.

    In CA I consider escrow to be a non issue either way

  22. I handle my property taxes/insurance myself for the simple reason of I don’t want anyone but myself responsible for financial things that can carry such a high price if screwed up (as mentioned above)

    Banks make money by having escrow payments in the bank and while I’m sure they wouldn’t knowingly do anything illegal (ya right), if a payment gets messed up and stays in their possession, earning interest for them, I doubt they would do much to fix the situation since it’s not their house that will be in jeopardy.

  23. MakingItWorkNJ says

    I have an escrow account and always found it convenient that I didn’t have to worry about the T&I when I pay my mortgage.

    One question I have is if the Bank royally f’ed up your payment to either insurance or county/municipality, is the Bank/escrow liable? Or is it still you?

    If it’s still me that’s responsible even if the escrow account was negligent, then I can see how escrows are useless, and handle them myself. However, I have way too many bills. Worrying about 2 less bills is very much appreciated right now. 🙂

  24. I voted that I manage my own escrow account, but I also have another house that has an escrow account. That one was a mistake by the lender that I found out about at closing and couldn’t change. We should be able to correct that soon hopefully, but until then, I have an escrow account. On one home we purchased, we had to have an escrow account, and they raised the amount of the payment by $150 a month. Then at the end of the year, they said, oops, the estimates were incorrect, here’s all your money back. Money that we could have kept in the bank earning interest (when interest rates were higher). That really annoyed me and I choose not to go through that experience again.

  25. Just bought my second home last July. Saved .25% on the rate by saying I would escrow. After 2 monthly payments I called my lender to tell them I no longer wanted to escrow. They confirmed I had enough equity and then said I no longer had to escrow. Awesome….so now I am doing it on my own.

  26. finallygettingtoeven says

    We have always managed our own escrows and I don’t remember a time when we had to pay extra for the ‘convenience’. I think it is a smart thing to do, as long as you are responsible. Not paying your taxes and insurance on time is not something you want to be playing around with.

  27. I manage my own escrow and conflate other “once-or-twice-a-year” expenses in the same savings account — car insurance, Roth IRA contribution (which I typically don’t make until the end of the year), etc.

    It is a nice little boost to my short-term emergency fund — I’d never want to spend my property tax money on something else, but it puts my mind at ease to know I have access to that money to handle any unexpected cash flow issues, and lets me lock up more of my “real” emergency fund in slightly less liquid savings.

  28. This may seem like a very stupid question, but:
    Am I paying interest on the entire amount of the loan including escrow? For instance, if I pay $1010 which includes the loan, plus insurance, plus the taxes, am I paying interest on the insurance and taxes due? I’m sorry if that is a dumb question, but I wasn’t sure. Thanks!

  29. ATG, you only pay interest on the remaining balance of your loan. Escrow payments eventually go to the respective billers like insurance company and property tax collector.

  30. I’ve always preferred control over my own T&I payments and decided against escrow—and recently discovered another reason why I’m glad I did. The company that originally owned my loan went bankrupt—the new company has not received all of the escrow funds customers have paid, because some of those funds are tied up with the bankruptcy! So some customers who had escrow with the former—are being forced to pay extra money to the new mortage co to bring their escrow balance into good standing (even though they already paid that $ to the former loan co) Hopefully it will work itself out in time—but I’m glad I dont have to deal with that headache.

  31. I justed started paying my own taxes. I am with Wells F and they just sent me a letter saying I needed a bigger cushion of $798.00 more in my Escrow account. Now my taxes only went up $17.86 a month this year. So I get a letter stating that I need to pay $798.00 in 30 days or my new Mortgage payment will reflect the $17.86 and the $798.00 in 12 “Easy” installments. So my new mortgage payment would increase by $66.5 To me this is a bit much. I could have paid this but really ticked me off. So I will now when I make my mortgage payment for Principle and Interest I will deposit the remaining in a savings/pma account for tax.

  32. After reading the posts, I am definitely leaning toward managing our own escrow account.

    First time homebuyer, purchased in May 2009. We are AD military and used our bank (USAA) that provided relocation services, including helping w/ our VA loan. I spent numerous hours educating myself on the whole home buying process. I don’t think we had a choice on the escrow account being a VA loan. They required 3 months prepaids of taxes and 10 months prepaid for insurance. We received an “escrow analysis” in April 2010 indicating we were $7900 short in escrow and our monthly mortgage payment would increase by $1100 in order to make up the shortage for the following year! I literally cried…how could this have gone so wrong? Where did I make a mistake? Thought I was so careful! No way we prepared for an $1100/mo increase. It was bad!

    Come to find out through many, many phone calls to escrow dept, county tax departments, title company, etc, the tax certificate used at closing to estimate the taxes were from Feb 2008…remember, I closed in May 2009, so a new assessment had been done in Feb 2009…it was $200K more than previous year assessment. That’s right, the title co or bank (no one claims responsibility) used a tax assessment on unimproved property. I felt violated! And to boot, when I called my bank, I got, “yeah, I see that all the time, so sorry that happened to you”. Are you kidding me? Is there not a law that prevents a lender from using a tax assessment on unimproved property? We were able to spread the “shortage” of $7900 over 36 months. That was the first foul. Second, we recently considered refinance and I called the escrow dept to inquire about the exact amounts paid for taxes in Dec 2009 so we could use these figures in our estimates. Get this, found out, in addition to the regular taxes paid in Dec 09, the escrow dept paid a property tax bill in Sept 2009, out of our escrow, for property taxes assessed in 2007! Remember, we bought the house in May 2009. Unbelievable!! Boy, have I learned some hard lessons. The escrow dept has offered up allowing us to manage the escrow for both taxes and insurance. Thanks for the advice. Looks like I will be managing my own from from now own!

  33. with a 10% down on a home purchase is there a bank that will allow escrow waver in the Dallas area? All the banks i talked to informed me i have to open an escrow account unless I put 20% down.

  34. We were foolish enough to choose to escrow our T & I; we just hadn’t thought it through enough and we were told that we could always decide to opt out later on. Wrong! For the past 4-5 years in a row, our mortgage service has failed to pay our homeowner’s insurance on time and caused our policy to be canceled. Fortunately, the insurance company has reinstated our policy each year when they finally received the payment; but we were without insurance during that time frame. Last year that was for over 6 weeks! Every year I have asked how to drop the escrow and every year they have given us different criteria for being able to do so. Last year they said we had to be below 78% loan to (original) value ratio. We’re at that point now – finally! – and now they are giving us a different criteria (prior to Jan, the rule was you could not have a late payment in past 6 months, now they’ve changed it to you cannot ever have a late payment during the entire loan term. We just had our one and only late payment ever for reasons too lengthy to go into here.) But they just keep changing the rules to their best interest. And we do not earn interest on our money that’s sitting in their account — they are!
    I will never get caught in this trap ever again! They kept changing the rules about when we could drop the PMI as well. First, it was after 2 yrs, then 3 yrs, then it was 4 yrs, then 5 yrs (and each year they would tell me that I had to pay for an appraisal or BPO to have the value of the home determined to make sure we owed less than 80% current market value); now it’s been changed to when we get below 78% of the original loan value. We’re at that point now, and I think they are required by law to drop it.

  35. we want to take escrow back this week WF said the taxes went up 400 a year and they wasnt another 300 a month plus 11, 0000$ and they wont say what that is for, my husband is disabled Gulf War vet he is getting discount property taxes around 400# off yearly and the bank doesnt want to hear that.
    we are both disabled and retired, where are we to find $11,000 at this stage of our lives……….we pay 2600 year for taxes really 2400 with Veterans discount and the taxes just went up to 2800, and WF predicts its going to be $5000 next year ( I doubt it) so we should give them an extra $11,000 sorry didnt mean to go off here good night God bless

  36. Millie – I did a refinance through Quicken Loans who put me into a conventional 20 year fixed rate loan. I was at 12% equity so not the 20% everyone mentions. While I have to pay a nominal PMI, I do not escrow either my insurance or my property taxes. There are loans out there that will allow for this. This is my second house and in over 12 years of home ownership I have never escrowed taxes or insurance and am not about to now given all the issues I’ve seen lately with servicing companies paying insurance late, etc. etc. I’d prefer to be in control of my own financial situation. Additionally, my insurance company takes out the insurance fees monthly instead of yearly which makes it much easier from a cash flow and budgeting standpoint.

  37. Just have to rant about our mortgage company, Chase will not let us out of our escrow!! We have been with them for just over 2 years, and so far they have failed to pay our homeowners insurance once and now have not paid our real estate taxes on time or at all!!! Instead, they refunded us the “surplus” in our escrow account…and raised our monthly escrow amount. How does that make sense?????? They have changed our escrow amount every 6 months or so and continue to send us checks for the “surplus” from time to time! I’m so furious and considering refinancing just so I don’t have to deal with Chase. Our county assessor said that we are not the first ones to have problems with them, and we live in a small county-only about 10,000 residents!

  38. Keri, they are right you have only seen part of what they will do at chase. I have been with them for about 6 years and they have done the same to me and they also have claimed that I am behind on mortgage payments by 2 months. This has happened numerous years usually at the beginning of the year but so far I have got them to relearn how to count or sober up from the egg nog. I am still dealing with them this year and to top it off they will try to make you pay their lawyer fees even though it is there fault. COMPLETE IDIOTS it is a nightmare hopefully i can refinance soon i have put it off until now and i can’t handle no more of them so my advice for everyone is to never use them and get away if you have they are bad news. {GOOD LUCK}

  39. I have been with Ocwen llc. for several years & every year my escrow is always short.
    My property tax & home insurance is included in my mortgage payment.

    I pay my mortgage payments on time.

    What’s going on?

    Thanks for any help.

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