Yesterday, I mentioned that we hired an appraiser to come and give us a full appraisal of our house for property tax purposes. When the appraisal came in much higher than expected – $15,000 over our purchase price 2 years ago – I wondered if we could benefit from this dramatic change.
I remembered reading before about taking control of the tax and insurance escrow your bank forces you to fund. The bank does this to make sure that you don’t accidentally lose their property by either defaulting on your taxes or by an uninsured loss of the property. Many banks and credit unions will allow you to take control of this account at a certain debt level – proving you are a trustworthy debtor.
I contacted my credit union and they said they would allow me to manage my own tax and insurance payments if my loan-to-value was less than 80%. With the new appraisal, my loan-to-value crept down to 80.4%. Apparently this was enough to convince them to release my escrow and they surprised me by immediately depositing my accrued balance of over $3,500 into my attached savings account. As soon as the check for that balance makes it to me, I will immediately deposit that into a new ING Direct Orange Savings account that I set up just for my own personal escrow account.
Immediately, by using ING Direct instead of my credit union, I will realize an interest rate increase from 1% to 3% and triple my earnings over the course of a year. The max amount in this account should be somewhere around $5,500, so I could earn up to $110 more over the year than if I had left it at the credit union.
This also opens up the option for me to use a short-term CD (6 months, probably) to gain even more interest. The downside of investing in a CD is that it requires me to have my full balance available up-front instead of direct depositing my escrow amount into a savings account. Plus, if I happened to have $5,500 just sitting around, I would rather start investing in some Vanguard index funds instead of collecting a mere 3% interest.
This method isn’t for the undisciplined, though. Since your bank isn’t making you save that money, you have to remember to do it yourself. That means setting up an automatic withdrawal or a direct deposit from your paycheck to make sure you’re saving enough for when the tax bill arrives. The last thing you want is for the county to auction off your property to pay your tax debt, so you must be sure to have the money you need for the tax bill available when it arrives.
If you’ve reached 80% loan-to-value, I recommend asking your lender about releasing your escrow. It won’t be a huge gain initially, but over time the interest will add up for you and you get the assurance of knowing you are in control of your finances.
{ 5 comments… read them below or add one }
When I refinanced through ING they didn’t do escrow, and I have loved it since! Our payment is quarterly, but it is still great to have full control. The extra couple bucks in interest is nice too.
I stumbled across this blog while researching for an article for my site and first I want to say I really love your “Financial Health” graphics on the right side… they give a great visual instead of just some numbers! I knew banks would take control of your tax and insurance obligations via escrow but I didn’t know exactly how that worked. Very interesting idea and you mentioned the threshold was 80%… I suppose if you bought a house with 20% down you would never have to have them manage it then?
Michael,
It really depends on the bank. I believe each bank is free to set its own rules. My credit union requires 80% loan-to-value maximum before they would release the escrow, your experience may differ.
Thanks. Unfortunately due to my income right I’m not in the market to buy a house now (but I would love to at these prices!) but this is nice to know. I had priced out a mortgage in 2006 and the tax/insurance part did add a significant amount to the bottom line. I can’t even imagine how much it adds in places like where my mom lives – Ann Arbor, Michigan. She has a 160k house (purchase a little over a year ago) and that taxes on it are over 11k per year… complete insanity, no wonder home ownership is not affordable for many.
I’ve heard this concept before, but the amount of work for the reward just doesn’t seem worth it to me. Sure “every little bit helps”, but in my mind, if you’re going to see financial success, you’ve got to be larger scale.