May Mortgage Update and Escrow Musings

Last month (April):
Balance: $58,365.65
Years left:4.5
P =$970.93, I =$243.47, Escrow = 613.58

This month (May):
Balance: $55,385.40
Years left:4.25
P =$983.37, I =$231.03, Escrow =788.73

One month’s prepayment savings: $7.91

As with much of the country, housing prices in our little town are starting to recover.  That means that property taxes are going up again.  Yay.  (Not really yay.)

Our mortgage provider tells us we have an escrow shortfall of $1260.93.  If we send in an extra check for that amount, our monthly nut will only go up by $70.05.  If we don’t, they’ll prorate for us and our monthly nut will go up $175.13.

So which should we do?  Here’s my thought process.

Pro (cutting a check):  Ugh, it’s just over a round number now, and if I prepay it’ll still be under a round number and my OCD will feel better.

Con:  Why should they be getting interest on our money?

Pro:  What interest?  Besides, if I really feel that way, I should ask them to stop escrowing for us and just pay it myself.

Ok, let’s double check that they’re not charging us extra to prorate… doing the math, there’s a 3 cents difference between the two.

Con:  Which is completely and totally negated by the cost of the stamp on the check, by an order of magnitude and then some.

Pro:  This is a good way of hiding money so we’re not tempted to overspend.  I’ve got too much in savings as it is, and this money is going to have to be spent sometime.  Why not now instead of when a negative shock hits us?

Con:  It’s only an additional $175.15/month.  Even if DH loses his job tomorrow we’ll be fine, and it’s better that money stay in the emergency fund.

*end conversation with self

So… which of these arguments were most important to me?  The one about the OCD and the one about the cost of the stamp.  Funny how the irrational stuff is what’s important.  Yes I have a PhD in economics.  Don’t judge me.  Irrational stuff matters when the decision isn’t really that important.

In the end, the cost of the stamp won out because I think we’ll either be significantly prepaying the mortgage for a while (meaning the fact that we’re $3 over a round number isn’t such a big deal since the checks will still be round numbers), the number will change again with the next escrow cycle, or DH will lose his job and we’ll re-amortize and get a completely different number.

Do you like to pre-pay escrow shortages?  Or do you do your own escrow?  Or have you decided to opt out of the whole mortgage thing entirely?

28 Responses to “May Mortgage Update and Escrow Musings”

  1. Practical Parsimony Says:

    My mortgage is paid, so no decisions there. However, I never could figure out what was going on. If I were short in escrow, the payment went up to fix it. If I were over in my escrow account, nothing was returned to me or accounted for in a monthly or yearly statement. I still think I was cheated. Or, maybe you know what happened to my overage.

    I resented the bank having my money ahead of time and getting interest on it. However, I liked the stable payments with no escrow amount or property tax due only one month. Oh, my insurance was included in the monthly payment. I am not sure why, but it was set up that way when we bought the house two years before I divorced, so I left it that way. I am quite sure I just thought that it had to be that way at first, then I learned differently.

    Now, I don’t pay property taxes because of my age and our state’s homestead exemption program..

    • Debbie M Says:

      No property taxes at all? In my state, once we turn 65, half of our taxes are frozen at the level for that year–the other half goes up as usual.

      If you were over, then your monthly payment for the following year would be lower than if you had not been over.

      My insurance was also escrowed, but I had no choice. I only had the choice of picking my own insurance. And when they added a wind insurance right after I had just read all the things my homeowner’s insurance covered, I told them I already had it. They didn’t believe me, so I got my homeowner’s insurance company to talk to them and they dropped it.

  2. Miser Mom Says:

    Me, I’d totally go with “hiding money so we’re not tempted to overspend.” Not that *I* am frequently tempted, but my guy is, so a low account balance is somewhat of a caution to him.

    Like Practical Parsimony, our mortgage is now paid. We get two tax bills and an insurance bill each year; I pay those each in one lump sum. It does take a bit of discipline to remember that those are coming up — they’re honking big bills when they’re not divided into 12-month chunks!

  3. plantingourpennies Says:

    We have never done a lump sum when the escrow came up short. There was no financial incentive to do so.

    We do lump sums on the taxes of our investment properties, though. Those have never been traditionally mortgaged, so we just cash flow the expenses for them during the month we pay them.

  4. Debbie M Says:

    I did not pre-pay shortages. I gleefully let the scumbags wait for their money since they didn’t charge me to do so. And doing my own escrow was not an option with them. Until I paid off the loan. Mwahaha!

    (No, I do not have any irrational issues affecting these decisions.)

  5. Rosa Says:

    I don’t think not escrowing is even an option with our servicer.

    It is annoying, though. Something about our tax system (I assume, since the insurance is monthly) makes our servicer freak out and send us a similar letter every single spring, and then later in the year they claim we’re overpaying on escrow and try to cut us back a check, and then the following spring they claim it spiked again. I don’t know what it is, but it’s been every year since we refinanced maybe six years ago?

    When we’re done paying off this heap we’re selling and moving into a one-bedroom condo – nevermind, I mean the plan is we will do quarterly tax payments as well as monthly payments into a house-fixing fund, just as if we still had a mortgage.

  6. Leigh Says:

    I self-escrow. My property taxes went up a pretty significant chunk this year. I think I had to set aside over an extra $100 for the two months after the bill came. Otherwise, it was an under $100 monthly increase. Not really a big deal. I’ve paid the first installment now, so I don’t have to set aside quite as much until the fall since I actually know how much it will be. I usually estimate 3%, but it was more like 15%.

    I like self-escrowing other than the fact that it makes spending a bit uneven. I only count expenses when they come out, so property tax and insurance (3 different months) are more expensive than usual.

  7. OMDG Says:

    Gah. The increases in property taxes and escrow are so irritating, especially when it seems you’re not getting anything tangible back.

    Isn’t this something where satisficing would make better use of your abundant cognitive resources? ;-)

  8. chacha1 Says:

    I don’t even know what “escrow” is in this context. :-) Law firms use the term interchangeably with “trust account” meaning “client’s money that we are holding for payment of future billing.”

    • nicoleandmaggie Says:

      Taxes and insurance the mortgage co keeps before paying the bills. Same idea, but the mortgage co is holding the $.

      • chacha1 Says:

        Is that a legal requirement when you have a mortgage?? Because I would barely trust most mortgage holders to calculate the interest and allocated the payments correctly, let alone manage my insurance and taxes.

      • nicoleandmaggie Says:

        Depends on the state. Most states the escrow is required until you hit some % of owning your house, I think.

      • Linda Says:

        Here in IL I’ve always been able to pay my own insurance. I just had to show proof that I have it. It may be that the escrow for taxes is tied to a certain % of equity, though. Until last year, my mortgages always included the taxes in escrow. I was able to wrest control of the taxes when I refinanced last year, though. :-)

  9. Chelsea Says:

    I’ve read these updates before, but (having never owned a home) I admit this is this is the first time I focused on the escrow amount and, in particular, how expensive property taxes are. You paid $613.58 last month and $788.73 this month and will still be >$1k short?!? That’s like $10k/year in property taxes! Between income taxes, retirement savings and mortgage/property taxes, I seriously don’t see how people have any money left over for anything else.

  10. zenmoo Says:

    The system is different in Australia /NZ – I have no idea what escrow is & we have offset account mortgages (I.e. All of our money sits in a transaction account and offsets the interest charged on our mortgage daily.) We pay under $500 quarterly in Rates to the city council to cover water/garbage removal/libraries etc & about $700/yr in building insurance including the government backed earthquake/natural disaster insurance levy.

  11. Linda Says:

    I ran into this situation a few years ago and decided to not go the lump sum route either. It just seemed like a better deal for me to let them “float” me the difference between taxes and escrow.

    When I refinanced last year, I finally was able to get control of my own tax payments and stop escrowing with the bank. It was just too screwy for me: sometimes I had not enough, sometimes I had extra, once the homeowner’s exemption wasn’t applied to my taxes so they were too high and they overpaid…such a mess!

    My property taxes are much lower than they should be because my house is under-valued by the assessor. Shhhhh…

    I just met with the real estate agent today about what I need to do to prep the house to go on the market. I should be away from here if/when the tax assessor finally catches up and raises the taxes on the house. (Although, they haven’t caught on for the last 12+ years, so who knows if they ever will!)

    • nicoleandmaggie Says:

      We won’t tell if you don’t.

    • Practical Parsimony Says:

      The tax assessment and the price you can command when selling are two entirely different things. One has nothing to do with the other. My house declined in condition, but the assessment went up because of “upgrades.” I had made no upgrades, but there is no arguing with the tax assessor. It makes no sense to me. Oh, you actually can complain, but no one ever wins.

      • Linda Says:

        Yes, I realize that assessed value for tax purposes and market value are different. I’m basing my comment on the fact that when I get my tax bill it says my house is a single story and has no garage. When I bought my Chicago style bungalow 13 years ago, dormers had been added at some point and there was a fully finished second floor with two bedrooms and a full bath. There is also a two car garage on my property. So, apparently the tax assessor has never noticed these things when they’ve looked at the property (even though they are clearly visible in the photos that accompany the assessment report that comes every few years.) Consequently, if I look at sites such as Zillow that are based on tax assessor records my house’s square footage and Zillow value are really low. This all works in my favor, though, so I really am not bothered by it. :-)

  12. Jay Says:

    We were required to have the taxes escrowed with our first mortgage. They didn’t pay them correctly. That was *it* for me. Now I pay the taxes myself (in one lump sum). I was overpaying the mortgage until we refinanced; we cut the term of the loan in half and the payment is the same as the amount I was paying (which was the amount owed + several hundred) plus they paid off our home equity loan, so in the end we’re saving $250.00/month and will pay off the house 10 years sooner. Should’ve done THAT years ago…well, at least it’s done now.

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