George Pizzo likes the control it gives him.
Linda Kaminski also likes the control, but mostly it was a way for her to refinance her mortgage without having to come up with a couple of thousand dollars extra.
What these two homeowners have in common is that both have recently set up a personal escrow account to pay their own homeowner`s insurance and property taxes.
This may be a good deal for you, too, with plenty of advantages.
But setting up your own escrow account is not for everyone. And there are stiff standards you must meet to even qualify.
More on that in a moment. First some explanations.
Escrow accounts are separate savings accounts that lending institutions set up, with your money, to pay for your property taxes and homeowner`s insurance. The payments for these two obligations are folded into your monthly mortgage. You pay one lump some each month to the lending institution, and it pays homeowner`s insurance (once a year) and property taxes (twice a year) at the appropriate times.
Interest-free
Some homeowners like this arrangement for the convenience it provides. But the money that accumulates in your escrow account builds interest-free. In many cases, this could be $100, $200, $300 or more a year of interest that slips through your fingers.
Some homeowners dislike that. If you`re one of them, there`s a way to maintain your own escrow account.
Lending institutions want to be sure you have a relatively large amount of equity in your property, that you have sufficient assets to pay your taxes and that you have a history of paying your other bills on time.
If that sounds like you, you may be eligible to set up your own account.
On average, lending institutions want you to put down 25 or 30 percent on your home.
In today`s housing market, where 20 percent is difficult for many would-be homeowners, that rule alone eliminates many people.
Added requirements
If you can clear that hurdle, however, then you merely have to show that you have the money in the bank to pay your property taxes, and that you have a good credit history.
Linda Kaminski and her husband, Tim, refinanced their home in May. Kaminski says she never maintained her own escrow account before, but decided to do so this time because she didn`t want to put up a couple of extra thousand dollars in advance to cover her summer taxes.
She`ll have to pay the taxes anyway. But this way she had several months to gather the money, rather than deplete her savings account.
By refinancing and setting up her own escrow account, Kaminski estimates that she cut her mortgage payment by about $300 a month. She has a little extra money at the end of the year when she figures out the interest she earns on the escrow account, probably around $150 a year.
”It takes a great deal of discipline,” says Kaminski. That`s another criteria that might not make this tip right for you.
You have to dutifully put away enough money-every week or every month-to cover your taxes. Otherwise, when the bills come due, you`ll not only get into trouble with the taxing agencies but you`ll also have to pay a late penalty for not meeting your obligations.
`Strong constitution`
”You have to have a strong constitution not to take the money out and spend it on something else,” warns Pizzo.
He socks money away each month to cover his taxes and insurance and has done so since 1985.
”I thought, `The bank has use of my money over 12 months, and they are making money on my money,` ” he says. ”But I like to be in control of what I am doing.”
Some lending institutions will not let you set up an escrow account if you earlier agreed to allow them to collect the money. If you`re interested in maintaining your own account, you`ll have to inquire about your particular institution`s policies.
Other institutions will only consider it if your mortgage exceeds $50,000, and if it is a conventional 15- or 30-year mortgage without FHA or VHA financing.
Debbie Geller, servicing manager at Liberty Mortgage Corp. in Michigan, says the company doesn`t write a lot of non-escrow mortgages.
”But more people are more aware of what is going on.” she says. ”More people are asking about it.”
Still others may decide that even though they qualify for a non-escrow mortgage, the bother of putting money aside each week and paying property taxes twice a year and insurance once a year is not worth the $200 or $300 they`ll earn in interest. Less, in fact, when you consider that you`ll likely have to pay income taxes on this extra interest income.
But Susan Hall, a certified financial planner, disagrees.
”Even if you are talking about $1, it`s your money and not the bank`s,” she says. ”There are a half-dozen things you can do with the money. Leave it in the bank to compound more interest. Buy Christmas presents. Make a 13th mortgage payment. Say it is found money and put it in an IRA.
”For people who are cognizant of using money to make money in every way, this is one of those ways.”
