A scenario for homeowners
This can get pretty confusing, so to make things simple, I've come up with the following:
- Your monthly mortgage payment is $1,000.
- The name of the lender that you have your mortgage through is XYZ bank.
- Your property tax bill (due in December) is $4000, which is $333/month.
- Your annual property insurance bill is $500, which comes out to $41/month.
Did you know that along with your mortgage at XYZ bank, you also have an escrow account? It's an account with your mortgage company that’s separate from your mortgage. It’s used to pay a third party, i.e. your property tax bill and your annual property insurance bill. To simplify, you write out your $1,000 check each month to XYZ bank. They deduct $333 for your property taxes and $41 for your insurance—$375 total. They set this money aside or 'deposit' it into your escrow account each time they receive a payment from you. What's left over pays your mortgage. When your property tax bill is due, that money is taken out of escrow and is mailed out (either to you or directly to your local treasurer's office) in the form of a check to pay your property taxes. Additionally, at some point during the year, XYZ takes money from your escrow to pay your property insurance.
Cashing out your escrow
Since it's February, your escrow account balance should be $750 ($375 January + $375 February), right? Wrong! What most people don't realize, is that your mortgage company typically requires that there be at least a couple of months of 'cushion' in this account. For example, if a three month 'cushion' is required, you may have as much as $1,875 in your escrow account ($375/month x 5 months). $750 is to pay taxes and insurance, but what remains just sits in that account. In this case, over $1,000. Now, for me, it's not easy to locate anything in my house. As a matter-of-fact, it was a day-long project to locate a mortgage statement, but was it ever worth it! Once I found my statement, all I had to do was call the bank and ask them if I could close my escrow account and have a check mailed to me. It was as easy as that. A phone call, followed by a large check in my mailbox. Not only is the phone call worth the extra money, but by setting aside the money myself each month to pay my bill at year-end, I'm not held hostage by my mortgage company, hoping and praying that I get a check in time to pay my taxes before December 31st. I need to write it off on my taxes, so if I don't receive that money by year end, I'm in trouble!
Tips to remember
Now, there are a couple of things to remember when doing this. First, remember that a portion of that money is probably for your property insurance—in this case, $41 a month. You’ll need to call your insurance company and make arrangements to pay your premiums on your own. Additionally, you must be disciplined enough to set aside $333 a month so as to pay your property taxes when they are due at year’s end.
Lastly, depending on the provisions in your mortgage contract, you may or may not be able to close your escrow account. My understanding, however, is that in most cases, you can. Check with your lender—it's worth the time. Good luck!
This is a guest post by Carolyn from Wauwatosa, WI.
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