Expert Gary Foreman
Question:
Gary,
My husband and I own our home and pay our mortgage bi-monthly. We pay our property
taxes twice a year and in our area it comes up to almost $400 each spring and autumn.
That's a lot of money to come up with extra during those times. A friend mentioned that
she had her property taxes somehow 'worked into' her mortgage payments and it didn't
increase them very much. This is something we'd like to look into, but weren't sure about
the details. Can you advise if this is a 'smart' thing to do and what exactly this process
is called and how it works. Thanks,
Kim in Indiana
Answer:
Good question! Kim's friend has her taxes "escrowed" as part of her
mortgage payment. Chances are that Kim's friend didn't ask for this service. Some lenders
insist on increasing your mortgage payment by enough to cover both taxes and property
insurance.
The mortgage company doesn't do it as a convenience for the homeowner. They do it to
protect themselves. Their loan to you is secured by your home. They don't want to find out
that the county is about to foreclose for back taxes or that it's burned down and you
didn't have fire insurance. By making the payments themselves, the mortgage company feels
safer.
But Kim needs to know that whether she pays her taxes in two big installments, or the
mortgage company breaks it down into 12 smaller monthly amounts the total that she pays
will be the same. Kim won't get a discount just because the mortgage company pays her
taxes. All they're doing is estimating the annual tax bill and dividing by the number of
months between bills.
The mortgage company will add that amount to your monthly payment for principal and
interest. The extra money is set aside and when the taxes come due the mortgage company
will pay the bill for you. A pretty straight forward operation.
OK, so if Kim wanted to break her tax bill down into monthly installments how could she do
it? One option would be to approach her mortgage company and ask if they'd set up an
escrow account for her. Or she could set up something that acts like an escrow account
herself. The simplest way is to set aside enough money each month to cover the tax and
insurance payments when they're due. That way there's no struggle to find the money when
the bills come in. If Kim's afraid that the extra money will be spent before tax time, she
can put it into a separate savings account.
Should Kim escrow money for her property taxes and insurance? Yes, she definitely should
set aside a little money each month to pay for taxes and insurance. That's a good idea for
any homeowner.
Even though it's expected, when the property tax bill arrives it still can be quite a
shock. In many parts of the country it's not uncommon for property taxes to be thousands
of dollars each year. That's a big hit on your checking account if you're not prepared.
It's more affordable to set aside a portion of the bill each month.
But, that still leaves the question of whether she should have the mortgage company escrow
the money for her or do it herself. There are a couple of disadvantages of having someone
else escrow your insurance and taxes.
First, if you write and mail the check yourself, you can be absolutely sure that it's been
done. No chance that an careless employee of the mortgage company forgot or made a
mistake. It doesn't happen often, but occasionally a mortgage company goofs.
Another advantage is that you have more flexibility. You may find that for your family
it's easier to set aside the money every other month or once a quarter. Forced monthly
escrow payments don't allow for that. You'll also have more flexibility if you need to
adjust your insurance policy. Especially changing insurance companies. If the mortgage
company is making your payment they'll need to be informed of any changes. Not a big
problem, but still one more thing to do. Or one more thing that could keep you from
shopping for lower insurance rates.
Also, the money that's in escrow might not earn competitive interest. At today's lower
interest rates it's not a huge deal. But it's always better to have your money earn a
little more for you.
Whether it's 'smart' or not really depends on your personality. If you're sure that the
money will be available or prefer to know that you wrote the check, then it's best to do
it yourself. However, if you're the type that might not have the money available, then
having your mortgage company escrow the money each month could bring peace of mind.
Gary Foreman is a former Certified Financial Planner who currently edits The Dollar
Stretcher website www.stretcher.com. You'll find
hundreds of free articles to save you time and money. |
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