With a large number of people in America currently trying to refinance their mortgages it begs the question should you allow the lender to manage the escrow account?
A friend recently refinanced his mortgage and opted out of escrow accounts with his lender. At first I thought this was some joke that he made up, I didn’t know you could even do that. It just makes sense for the abnk to require you to Escrow to protect their investment. When I asked him why he said why give them your money so they can make money on it. Man! I feel kind of like an idiot now for paying escrow, but then I thought to myself “is it really worth it?”
To start with most lenders will require you to pay an additional fee to opt out of escrow payments, some lenders may charge a flat fee and some may charge .25% of the loan. We will assume it was $500 or .25% of a $200,000 loan.
Let say you have moderate to low property tax on your mortgage and your total monthly contribution to escrow is $190.00, keep in mind you will build the savings up through the year and then back to zero for the start of the next year. At $500 how long would it take for you to make your investment back.
At 1.85% APY you would only make around $19.32, that first year. If you continue to keep your earnings in the account year after year it would take 22 years of your 30 year mortgage to break even, see the below pretty little graph.
Assuming the same rates for 30 years, I hope they go up, you end up making $765.08 in interest over the life of your 30 year loan, minus your $500.00 penalty you are looking at $265.08 in funds that you wouldn’t have had otherwise.
If you were shooting for a 15 year mortgage you are looking at a loss here and you would have been better off not paying the fees and letting the mortgage company handle the escrow, at 30 years though you made out OK.
Keep in mind you HAVE TO pay your insurance and your taxes on time, the taxman can take a lien out on your house and a lapse in insurance could cause you to end up with EXPENSIVE forced place policies from your lender. I say go for it, but if you are the type of person who isn’t good with pretending money doesn’t exist I would let the mortgage company handle it.
Do you have a similar experience you want to share? Leave me a comment or hit me up on Twitter
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I opted out of escrow and when the lender said there was a fee for doing so (I think it was something like $250 or $300) I said flatly I was not paying them a dime and that I was offended by what I considered blackmail. I said that if they did not waive the fee I would simply walk from signing (This happened during the close which is when I found out for the first time about this fee).
They did waive the fee. I guess they saw in my eyes that I was not bluffing; I was completely ready to walk (Maybe a boneheaded proudful move but I was offended.)
So in my particular case I have made an average of about $100 a year by not escrowing. Of course, if you pay the fee you probably lose money, not to mention you have to handle the payments for taxes and home insurance yourself.
Good for you and your friend! Sometimes escrows are money not-well-spent and sometimes these fees can make you feel outrageous. Beware or less “protection” tho. These things are there for a reason and the industry has thrived.
I stumbled over your website because I want to opt out of escrow because I’m tired of dealing with my mortgage company (Chase Home Finance) to get them to handle it right. My insurance agent (State Farm) is not dealing with flood insurance directly anymore, so they switched us to the government agency NFIP. NFIP sent a bill giving us an option of 2 different levels of coverage. My mortgage company wasted no time in paying the higher option, when it is not what I want, nor is it necessary. First, when I called them they said I needed to call my agent. My agent then said that she can’t get money back that a different corporation paid. So I called Chase back and now they said I am the one who needs to call NFIP to fix it. I inquired about opting out of escrow, and Chase says that I can’t unless I pay off the mortgage, or re-finance. ARRRRRRGH!
And not to mention when we were first required to pay property taxes, home-owner’s insurance, and flood insurance, I was the one who had to make all the phone calls to verify that Chase had the bill and that it would get paid on time. I would much rather pay my own bills on time than have to deal with making some other agency pay my bills on time. And I have more interest in keeping my house insured in case of damage because it is where I live. Chase doesn’t care, except they’ll lose some money. Yeah, they don’t want to lose money, but they could just write it off of come after me for the money, so in the end I’ll be the one who loses out, not Chase!
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