To Escrow or Not Escrow

With our new house, since we’re planning on putting down 20%, we were given the choice to escrow our taxes and insurance or not.  I didn’t realize this was even an option – we’ve *always* escrowed.  Of course, this is the first time we’re putting a full 20% down on a house.  There are advantages and disadvantages to each option, but I think we’re leaning towards not escrowing because we know we have the discipline and would like the interest.

To Escrow

Escrowing is “easy” – we don’t have to worry about paying our property taxes each year – the mortgage company takes care of it.  If we were bad at budgeting, escrow would be a good thing.  However, we’re pretty good at budgeting for long term expenses (we do it for our vehicle property taxes as well as car and life insurance).  If we don’t escrow, we’ll have to save up for the first payment – which is in April for my mom (same county, different school district).  Now, our home should be assessed as unimproved land for that first April payment, but then we’ll need to pay the full amount once they figure that out.   That’s potentially having to save 8k in one month for taxes.

To Not Escrow

One of my pet peeves about escrow is the analysis that they do each year and it alternates between sending us a check for a few hundred dollars and us owing a few hundred dollars per year.  I wish they’d just assume that the taxes will be higher (because they probably will be!), and charge the difference – instead they send us a check, and are “surprised” when we owe money the following year.

If we save our money ourselves, we’re looking at earning interest on about 9k/year – not much right now, but possibly more in the future.  And we want to pay the mortgage off in about 10 years, so we’d be paying the taxes and insurance ourselves anyway at that point – might as well get used to paying it ourselves now.

Have you had the choice to escrow or not?  What did you choose and why?

6 thoughts on “To Escrow or Not Escrow

  1. plantingourpennies

    We’ve never really had the choice, but as it ended up our primary residence has everything escrowed, where our investment properties do not. I’m kindof ambivalent on it. There was once when our taxes skyrocketed after we bought the place and had to challenge them that I was really grateful the escrow basically loaned us around $1800 interest free and extended the payback period for 60 months while we completed the tax challenge (cash was a lot tighter then). Now it’s just relatively easy and convenient to escrow. The others I have to remember when the flood insurance, homeowners, and taxes are all due. Not a big deal but it’s just adding to the list of things to schedule.

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    1. Mom Post author

      My biggest concern is a huge tax bill right away since 1) I don’t know when it’ll be due and 2) with the new construction, we only have a very large ballpark idea of what it will be.

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  2. donebyforty

    We always choose to escrow, even though we could swing either alternative. The thing I like most about making regular monthly payments is that it’s easier to calculate my true savings rate. Each month is reflecting our annual costs more accurately than if they came just once a year.

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    1. Mom Post author

      I use YNAB to figure out my savings rate, and I just ignore line items that are ‘for later’, but you do bring up another point to keep in mind when figuring out our savings rate if we don’t escrow.

      Reply
  3. Leigh

    I chose to not escrow and I love it. I own a condo, so insurance is < $200 for the year and is bundled with my car insurance, so I just pay them all together once a year. My property taxes are just over $3k for the year, although I think they'll be almost $4k next year (yay for property values going up!). I'm good at setting aside the funds for non-monthly expenses, so it's pretty simple this way. Since I have no plans to change my checking account anytime soon, I set up the payments for the property taxes to come out of my checking account once I get the bill and then don't worry about it! It's like escrowing, but even easier.

    I hear stories all the time of the escrow amount being wrong. The amount I set aside isn't always right since I assume 3% increase and they've been 1.5%, 18%, and projected 20% for next year, but that's not a big deal since I can just course correct easily with the nice buffer room in my budget. I think it bugs me much less when my estimate is off than when an external company's estimate is wrong!

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    1. Mom Post author

      Our escrow amount was *always* wrong. We’d switch between paying about $700 in a year to getting a $700 check because of the stupid averaging and minimal amount rules. I’d rather just keep the $700 in my account all year and “pay” it next year.

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