So this past year there was an error with my escrow and I am now having to pay 250 extra a month on my mortgage. Its kind of complicated to explain but it was an issue with switching insurance and not a banking error, or like an unexpected spike in taxes.
Anyway I have been looking at my mortgage payment break down and the more I look at it the more I am just like "can I get rid of escrow and pay out of pocket instead?"
Like put money aside myself every month for taxes and pay insurance monthly myself instead of yearly through escrow.
The money is already budgeted in, so my expenses wont go up. In fact doing it myself would lower my monthly costs. I know that means I am taking the personal risk with my taxes going up unexpectedly or something, but I feel I can handle that responsibility.
Of course I need to research my mortgage agreement to know it this is even an option, but has anyone gotten rid of escrow and regretted it? Is it really that hard to pay taxes yourself? Just want some insite before I go further down this road.
EDIT: Second question. If i tell my lender to pull escrow, will I get the money in the escrow account back? I know there is a cushion , and it may be part way through the tax year when I do it, so I'll have made partial payments already.
Is it insane to get rid of escrow?
byu/Main-Yogurtcloset-82 inpersonalfinance
Posted by Main-Yogurtcloset-82
30 Comments
Typically your mortgage is going to require it because they are not going to trust you to buy insurance or pay taxes jeopardizing their asset.
Not insane at all. Anybody good at managing their own money doesn’t require it. Plus, ostensibly, letting them hold your money all year long for a once and twice a year payment might be costing you something compared to letting that money sit in your own interest earning vehicle.
I did this on my last two mortgages. I prefer it that way and it was a simple online request. PennyMac is the servicer.
If by error, you mean shortage it’s a very typical thing. It’s happened to me most years since I’ve been a homeowner (3 states, since 2012).
This is generally just because taxes and insurance usually go up. You’ll still incur the same increase, you’re just managing it separately (again assuming a shortage).
No. When I bought a house I refused to do escrow. I pay my own taxes and insurance. I don’t need the morons at the bank who are bad at math estimating incorrectly. To do this you generally need excellent credit and you have not have PMI.
I’ve only done mortgages that don’t require escrow. I made sure they didn’t charge me extra or give me a higher rate for this feature. Insurance is autopay and property taxes I just paid 2x year directly.
Not insane. We pay our insurance and taxes directly. I think more people should do this to understand how much taxes and insurance go up each year. I think a lot of people just consider that “the mortgage” which also then leads to so many people upset when they pay the mortgage off and frustrated that they still have to pay taxes.
If your mortgage agreement allows it, then yes, you can opt out of escrow.
By law, your mortgage servicer is limited to holding two extra months of payments in your account as a cushion. So yes, technically you could reduce your monthly costs by not giving yourself that cushion, you’re probably well advised to set aside roughly the same amount that your mortgage lender was asking you to.
You can visit your county’s website and learn how to pay your property taxes.
It is possible to get rid of escrow, but it doesn’t get you out of paying your insurance and taxes.
One thing that hasn’t been mentioned yet, but you might not be able to get out of your escrow.
It’s dependent on the lender, but they might reject you coming off the escrow.
I got rid of mine and don’t regret it. I have my insurance set up so that it auto pays monthly by credit card (and I get points!). The main risk is making sure you remember to pay your tax bills when they come due, since you can trigger an event of default if you forget to pay one. You are the best judge of whether you are someone who pays or forgets about bills. I have a separate savings account where I set money aside each month, just like an escrow, so I don’t have to worry about coming up with funds last minute.
Banks will let you get rid of escrow, but they usually have some requirements. For example, a history of on time payments (usually at least 12), enough equity in the house (usually at least 20%), and the like.
I’ve never used Escrow, it’s much better to manage insurance and property tax payments myself.
Not insane at all if your mortgage company allows it. Generally you will need at least 20% equity.
Not having escrow means you will be paying your taxes and home owners insurance on your own. You will know exactly what is due and no longer are relying on the mortgage company to make the payment for you.
Escrow sucks. In addition to holding the money interest free, you can usually generate credit card rewards with the separate tax and insurance payments.
I got rid of mine a while back for just such a reason. They can never get the payment even close to correct which always requires an extra payment and the last time they would not even allow me to just pay the shortage out of pocket. They required me to “let them” break it up into 36 payments over three years. When I canceled, they sent me a letter with the check expounding the virtues of letting them pay my tax and insurance bill once a year for me (which they managed to not do two different times) all while maintaining a 10% overage balance.
I always get rid of escrow as soon as the lender will allow it.
I can budget myself and it’s a service I don’t need.
They will refund the escrow balance if escrow is terminated.
I did this once and investing the savings wasn’t worth it for me. Not insane at all though.
We had a kind of sheisty mortgage company that helped us refi… Thankfully we are no longer with them anymore. However, when they did the refi, they didn’t include escrow. At first we were pissed after signing the mortgage docs… Then we realized in our tax situation, we were getting enough back each year to pay all expenses for escrow out of our refund.
So lower mortgage payment for budgeting, and tax refund pays escrow expenses every year.
I’m going through the same thing right now. I switched home insurance this year to save an extra couple hundred but escrow paid out the org insurance plan, and then I got a big check back and then escrow paid out the second insurance. So I need to give them like 3300 to cover the insurance plan plus have a 10% buffer. But I also have ADHD and am not confident I’ll remember to pay the tax nyself
Plus you won’t have to worry about the two month cushion they hold.
Always try to avoid escrow. Interest free loan to a bank… no thank you.
Just sock it away, earn a little interest and make your payment for taxes and insurance as needed.
Used to be banks would charge a higher interest rate if you didn’t escrow
Some lenders require taxes and insurance to be done through escrow. So you’d have to check if they allow you to separate them.
Then it’s just a matter of having the discipline to budget for those larger 1-2 times a year payments rather than having it built in monthly
I’ve done both ways and personally prefer having escrow so I don’t have to worry about forgetting taxes and insurance. But if you are responsible with savings and remembering, it’s fine to pay them yourself
The minute I could I requested that escrow be stopped. Why should I give the bank my money for a year until taxes are due. I could easily manage it
I went with no escrow when I refinanced in 2021 and I’ll never have an escrow account again if I can help it. I much prefer earning interest on the money I set aside during the year in a HYSA and just paying my insurance and property tax myself once a year. I’m paying myself to maintain my own escrow.
Here in Canada escrow is actually rare. We just pay our insurance and tax bills when they are due ourselves. I’ve been doing it for 12 years without any issues.
I always pay my insurance on my own. I did it yearly. The first condo I owned I was able to pay my property taxes on my own as well because of my high downpayment.
I put 1/12th of my real estate taxes in my savings each month. I was fine doing that but I hated taking the money out of my savings to pay the taxes twice a year.
The problem with escrow is that banking laws require 1 1/2 times your monthly amount owed in your account at all times. That is extra money that is just sitting there not earning interest.
Adding for your second question, you absolutely get the full balance back. They may not allow cancellation within a certain amount of time of the next payment due, but once you are in your window of being able to close escrow, they will mail you a check for the full balance.
If you are subject to PMI, that will stay “in escrow” though it’s a monthly charge typically, so you would not have an escrow balance.
Never done it. Never will. Pointless if you know how to manage your own money
You have to consider who is more likely to make a mistake, you or the bank. And it really depends on you and your bank! Everyone’s going to have a different answer to that question.
I used escrow accounts when I was the one more likely to make the mistake. Later I switched it because I got better and the bank got worse 🙂
I tried to do this, thinking I could do better in a HYSA. Turns out our 2020 refi to a 15 year @2.625% included a basis point reduction but must maintain escrow.
Just another example of “The things I’ve learned from the fine print AFTER the fact”
But- I’m not gonna balk at 2.625%