If you’ve received increased monthly mortgage payments from your lender this year, you’re not alone! Homeowners nationwide are facing higher payments this year due to escrow shortages. A typical mortgage payment allocates a portion to an escrow account for future expenses such as property taxes and home insurance.
Costly Surprises
As noted in What You Need to Know Before Making an Offer on a House, a lender establishes a mortgage escrow account to estimate and manage separate funds, which can sometimes result in a shortage caused by rising property taxes and insurance premiums. When a shortage occurs, the lender requires the borrower to make up the difference with a lump sum or higher monthly payments. Unfortunately, this can come as a total surprise to some homeowners since they may not have been aware of the possibility of fluctuating costs. Who actually enjoys costly surprises? Definitely not me!
Personally, I would much rather be the one managing my own money.
A Self-Managed Escrow Account
Government-backed loan options and certain lenders require an escrow account, while others may offer borrowers the option to waive it depending on their loan terms and financial situation. Brian and I began self-managing our escrow account when we paid off our mortgage. We quickly realized that we preferred it way more than having a third party involved, so we stuck to managing it ourselves when we bought our new place.
With a self-managed escrow account, the homeowner remains in control. Just like with home improvement, I believe that no one else will be as invested in your project (or money) as you are.
There are three key reasons why managing our own escrow account has been beneficial for us: control, transparency, and earned interest.
1. Freedom to control our own money
Plain and simple, Brian and I don’t trust a third party to handle our property tax and insurance payments. My previous lender underestimated my taxes, resulting in monthly payment fluctuations. They also misallocated extra principal payments for months! It eventually got sorted, but not without some frustrating conversations.
Instead of adhering to someone else’s estimations and monthly installments, we choose the freedom to determine where our money goes and when it goes there.
2. Transparency to ensure all funds are properly accounted for and allocated
Every year, we receive an assessment of our tax bill, an official tax bill, and a property insurance renewal statement. While it is the responsibility of the homeowner to stay informed about these documents, many homeowners overlook them and simply rely on the lender to handle their escrow without reviewing the details. Unfortunately, relying on a third party can lead to potential errors or misunderstandings about important financial information.
Self-managing an escrow account can help homeowners be more observant of billing statements and due dates. Instead of estimating payments, a homeowner can be sure of the exact charges and can pay the bills in full. There’s no mystery or confusion regarding escrow shortages due to underestimated costs. Additionally, homeowners who are more focused on incoming bills are more likely to shop around for competitive insurance rates or appeal property assessments when necessary.
Through a self-managed escrow, Brian and I can maintain full visibility and control over how our money is allocated, guaranteeing it is managed and disbursed accordingly. We don’t have to worry about the possibility of our lender mishandling or delaying the release of payments. By paying our property tax bill and insurance premium directly, we can easily monitor and track each transaction to ensure our bills are paid accurately and on time.
3. Ability to earn interest
We want to make money from our money! One key reason we handle our own escrow is to avoid letting our money sit idle. Brian and I aim to earn returns wherever we stash our cash. Our escrow payments are no exception. In order to optimize our returns, we set up a holding account that functions as a sinking fund. Rather than earning 0%, our escrow account currently earns over 4% while safely sitting in a high yield savings account. It might not be a huge return, but at least it’s not zero!
Bonus Tip: Earn Rewards
Check to see if you can use a credit card to pay your property taxes! If your county or locality allows for no-fee credit card payments, you may be able to earn credit card rewards like cash back, travel points, or airline miles. By using a credit card to cover property taxes, you can also reach the minimum spending requirements for earning a sign-up bonus on a new credit card.
While this can be a great way to earn rewards, it’s important to ensure that you are able to pay off the credit card balance completely or use a card with 0% interest to avoid accruing interest.
Just Another Bill
While self-managing an escrow account works for us, it may not work for others. Each situation is unique and comes with its own set of considerations.
Ultimately, Brian and I view paying our property taxes and home insurance as no different from paying any other bill. We don’t find it necessary for someone else to handle the process. By managing our own bills, we have a comprehensive understanding of our local tax system and overall financial situation, allowing us to make better-informed decisions on our budget plan for the year!
Do you prefer a lender-managed escrow account, or would you feel more comfortable self-managing your own escrow account? Let us know below!
