Skipping escrow was at the top of my list when applying for my first mortgage because of my parents’ fiasco with their tax escrow account. Is escrow always a bad thing? In theory, no. Or at least until there’s a problem.
If you are thinking about skipping escrow to pay your property taxes, make sure you first think through the implications. You can still see the frustration on my mom’s face when she hears the word escrow. A miscalculation by the mortgage servicer put an ugly stain on our family’s finances for months. And to make matters worse, the company refused to acknowledge they were wrong.
While it may seem like managing your property tax payments will save you headaches, make sure you know what you’re getting into first.
What is an escrow account
An escrow account is an account held at your mortgage servicer to set aside money to pay your property taxes and insurance payments. As part of paying your mortgage each month, you’re also sending money in advance to save for future property tax and insurance payments.
This allows you to pay one bill and have someone else send your tax and insurance payments. The amount you need to pay is adjusted annually based on the bills.
Is escrow good or bad?
To some degree, liking escrow comes down to personal preference. If you prefer to make one payment to cover multiple bills, then it may work better for you.
You need to be self-disciplined to have both have the cash available to pay the bill and remember to pay it since it’s not a monthly one. For property taxes expect to receive one statement a year with the amounts you need to pay quarterly.
If the mortgage servicer miscalculates how much you need to save each month or has a snafu sending the payments on your behalf, you’ll be in for a series of headaches.
Assuming you’re aiming to own your property without a mortgage in the future, you will need to be able to make those property tax payments regularly.
Before you consider skipping escrow, make sure you can answer these 3 things
If you’re thinking about skipping escrow, you need to start with the facts to ensure you qualify to skip escrow, how to remove it later if you don’t, and decide if it’s the right route for you.
Let’s take a look at each of these considerations.
Confirm the criteria for waiving escrow upfront
Mortgage companies open an escrow account to ensure your property taxes are paid. The company wants to make sure their risk in lending you a large amount of money is safe. When you’re shopping for a mortgage, discuss the criteria for waiving escrow with your broker or banker.
If you put down at least 20% of the house value as part of the purchase and have a solid credit score, waiving escrow is usually an option. By having a large down payment, you’re showing the bank you’re very likely to continue paying for the house.
Know the criteria and process for removing escrow later
Depending on the mortgage company, you may need to have an escrow account upfront and can remove the requirement later. Ask your banker or broker for both the requirements and process to remove the escrow requirement on your loan.
Make sure you start the mortgage process knowing all the facts. And while it may sound easy, it may not be a simple process. It may take a phone call to the servicing center at a later date to make the change.
Are you sufficiently organized to pay a large, quarterly bill?
The benefit of having an escrow account is you make one monthly payment to cover your mortgage and save money towards your property tax and homeowner’s insurance bills. The mortgage company takes over sending the quarterly or annual payment when it’s due.
If you decide to skip escrow, you need to keep track of when the payments are due and make sure you have the cash available to make the payments.
If you don’t consider yourself an organized, self-disciplined person, this may be a challenge for you.
Don’t let this discourage you. Building better money management habits is a great way to grow. And you’ll need these skills once you pay off your mortgage.
4 tips for paying your property taxes on time
With more than ten years of property tax payments under my belt, I learned a few tricks to stay organized and stress-free.
Set aside money each paycheck into a separate account for your property taxes.
Your quarterly property tax payments will likely be one of the more significant bills you pay. If you save a portion each paycheck using a sinking fund in combination with the half budget payment method, you’ll have the money ready to go when the bill is due.
As this is one of those bills that need to be paid in cash and not credit, having the money available is essential.
Setup an electronic bill payment payee for property tax payment
Check with your municipality, but your bank should be able to send a check or electronic payment like it would for any of your other bills.
Pay attention to how your bank deducts the funds to pay the bill from your account. The bank is likely sending a paper check for you and may take the amount out of your account before your targeted payment date.
I usually set up the payment to be received by the city one business day before the due date. Given the importance of paying this bill on-time and in full, it’s not a bill you want to mess around it.
Confirm your municipality received your payment
Your municipality likely has a place on their website to check if your payment was received. Checking that your account proactively is essential to keeping it in good standing. You never know when there will be a goof, and the payment isn’t applied correctly.
Setup a recurring calendar reminder
Quarterly payments with no paper or electronic bill can be easy to forget. Setup a recurring calendar alert to make sure you send your payments on time each quarter.
Your municipality likely won’t remind you about your payment until it’s late. Save yourself the late fees and headaches with a simple recurring reminder.
Wrapping up, what do you think about skipping escrow or not?
If you already have a mortgage, did you have a choice between skipping escrow or not? Would you have done things differently if you knew more? Thinking back to my parent’s escrow account fiasco, I knew I wanted to skip the headache and pay the bills myself.
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