Should You Take Control of Your Escrow?

Gain Control of EscrowManaging your own escrow used to be a popular technique among homeowners. But like all things, it has gone in and out of fashion. There was a time when taking control of escrow saved time and hassles. When the bank managed the fund, homeowners had to forward all of the insurance and tax bills to the escrow account, wait for it to get lost in the mail so they could send it again and wait to get threatening letters from the tax man or the insurance agent. Then there was the inevitable one-hour call to the bank or servicing agent, getting transfered to five representatives until you could find one who was willing to help you get things straightened out. But these days, letting the bank manage your escrow is nearly hassle free. But there are still good reasons to manage your own escrow.

First, let’s make sure you understand just what escrow is. It is an arrangement between two parties (i.e. a home buyer and a mortgage lender), where a trust banking account is opened and held in the name of the borrower, and then maintained by the lending company. This trust account is used to pay home related fees such as property taxes and the premiums for the borrower’s homeowner’s insurance. The taxes and insurance are often called “escrow” because they are so often associated with these kinds of accounts.

To fund the account, the bank will estimate what it thinks your insurance and tax bills should be and then charge you 1/12 the total each month. Because banks now have services that hunt down tax and insurance bills for you, there is no aggravating paperwork or phone calls to deal with.

So if this system works so smoothly now, why would someone want to manage his own escrow? Why not just let the bank take care of the dirty work? One noun most aptly describes the reason: control.

When you manage the funds to pay insurance and taxes, you set it aside only in the exact amounts needed and when it is needed. Banks sometimes charge the full year’s escrow up front, meanwhile your money sits in the account and earns you nothing. Why not put a years worth in your own high-interest account and pocket the interest? Better yet, put it down towards the principal on the loan!

Instead of being at the bank’s mercy when an escrow increase comes, you have the freedom to save the money if you please. Some people pay taxes and insurance on credit cards to get an extra 30 days interest out of the money. You can really squeeze a good chunk out of your escrow if you manage it well.

You will also be in control to be sure those bills are paid on time. Where you forget to pay or whether the bank misses a payment, you are still the one who gets the late fees on the taxes or the cancellation letter from the insurance company. When you manage the funds yourself, you are in full control, with the ability to know with certainty that the bills are paid on time.

You may also be able to save money by managing your own taxes and insurance. When the bank manages escrow, there are fees associated with the account maintenance. Those costs are usually passed on to the homeowner.

Unfortunately, not all lenders allow owners to manage their own bills for taxes and insurance. Only the best risks with an excellent loan to value ratio will be approved.  So managing your own escrow is not an option for everyone, but it is still a good idea to ask at the time you are applying for a loan and again at closing just to be sure.