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