Friday, May 23, 2008

You Don't Have to Escrow your Property Taxes

One lesson I learned from our recent house purchase is that you have the option to do a waiver of escrow for property taxes and insurance items. By doing this, you are avoiding the opportunity cost associated with those monthly escrow payments and instead use the equivalent non-escrow amounts to grow it to your advantage (instead of the lender enjoying the interest on it.)

You see, your monthly house payment is typically composed of:
- mortgage (and private mortgage insurance if loan is >80%)
- real estate/property taxes
- hazard/homeowner's insurance premiums
- flood/wind insurance premiums

The last 3 are escrow items and if you did have them escrowed, you will be including the estimated amounts for these escrow items in the payments you send to the lender on a monthly basis. However, these escrow items are only due (to the state or the insurance companies) once a year. Property taxes are due in October in Texas (other states may have different schedules but it is still due annually or biannually). Insurance is due a year after you purchase the house. See my point? Escrow payments are collected monthly from you, while actual payments are done annually by the lender to the "service provider".

What that means is that the lender is earning interest from your monthly escrow payments. That gain is on top of the loan interest that you are paying within the mortgage payment. Depending on how much your escrow payments are, the additional escrow interest could be significant.

You can do a waiver of escrow on these and manage them yourself. So instead of the lender taking advantage of this, you are actually the one gaining interest on the equivalent non-escrow amounts.

Why should you take on the headache of managing the equivalent non-escrow amounts yourself? Again, it boils down to what you think your time is worth vs the amount you will be earning for yourself.

Of course, this method does not have its RISKS:
1. You can use the equivalent non-escrow amount for something else.
You really have to be disciplined about saving and growing the amount that was supposed to be escrowed. The good thing is that there are many ways to do this.

One of the most common being - Open a high interest account (money market account or CD or some other more aggressive investments) and do a direct deposit to it on a regular basis. This way, it becomes self-managing and you don't have to spend time transferring from one account to another or from avoiding spending the amount (if you did not create a separate account). (I'll share some more details on how we do it in a future post. Be on the look-out for that!)

2. You can miss the payments to the "service providers".
You will have to manage the payments yourself - know when it is due, send the payment on time, etc. For these payments that come once a year, the state and the insurance companies are pretty good on sending your the estimates and bills. That should be a good reminder for these once a year payments.

And... you should not have to worry about not having the $ to pay for them if you were doing the disciplined saving that we mentioned previously, right???

So do you think it's worth your time to manage the equivalent non-escrow amounts on your own? Do the math! If it shows something significant enough for you, ask yourself - "Do I have the disciple, time and inclination to do manage the equivalent escrow amounts?" If the answer is yes, then go on, do the waiver of escrow and do it yourself! You can do it, too!


Ge,  May 23, 2008 at 5:29 PM  

What a smart idea! We'll look into it...I think we're disciplined enough???!! to put aside the money and pay on time:))

Your idea came just at the right time....we'll start building our house in the next month or so. Any other money saving ideas?

Rela Pantaleon-Manigsaca May 23, 2008 at 10:28 PM  

Hi Ge!

I'm confident that you are disciplined for this. If we can do the annual income tax, we can also do this annual property tax and insurance thing. Ikaw pa!

BTW, I think you will get a better deal when you inquire about this towards the end of the loan negotiation (probably when you have your interest rate frozen). This way, the lender will assume that the escrow is in their bag already.

I've got a couple of things more to write about this subject, so keep reading and giving me feedback!

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