A lot of mortgage holders don’t realize that they have an option to pay real estate tax and homeowner’s insurance themselves. This just takes some more effort and self discipline. The reward is that you can make profit on the money that would otherwise sit in the your lender’s account and would not make you a penny in profit.
The first step is to get a mortgage that doesn’t escrow property taxes and home insurance. Simply ask for this option when getting a mortgage or refinancing. There is also an option to change this later, but also note that not all loans allow this option, such as FHA loans, where escrow is required. Overall, it’s a little more difficult to get a mortgage without escrow. Conventional loans usually allow this but interest rate may be slightly higher and you must have at least 20% in equity, in other words the loan may not be more than 80% of the value of the property.
If you were able to get mortgage without escrow it still means you are obligated to pay property tax and home insurance. Therefore this technique takes a little bit more work than just paying one mortgage payment that includes principal, interest and escrow. So you need to set up a few things to make it easier to manage your finances in order to have enough money stashed away when the bills are due.
- Determine what is the yearly real estate tax on your property and how much is the homeowner’s insurance. Divide the sum of these amounts by the number of paychecks you receive during the year. This amount is the minimum you need to put away from every paycheck. You may need to adjust this amount every year as tax rates and insurance premiums change every year.
- Open a savings account with the highest interest rate you can find. This will be your own escrow account. Then ask your employer to direct deposit part of you paycheck and set up the deposit so that the amount you need to save is placed into this account. Most employers support direct deposit and most of them allow to split the paycheck into several deposits into separate accounts.
- When the bills are due, usually every 3 months for real estate tax, or once a year for the homeowner’s insurance, transfer needed amount to your checking account and pay for the bills.
If you do just as outlined above, you will earn interest on money stored in “your personal escrow” account. But there are other places where you can save. For instance, It is cheaper to pay the insurance in full, instead of in monthly installments. Or you can use a credit card with cash back, typically 1%, to pay taxes and insurance to save even more money. But check with your municipality if they accepts credit cards for paying property taxes. It’s important to pay off credit card using the money put aside to avoid interest, otherwise this wouldn’t make any sense.
Also you can get creative, for instance when you have balance on your credit cards, you can use that as your escrow account. When you regularly payoff the credit card you essentially save on it’s high interest, then pay the tax and insurance bill using that card.
Just remember, you may get in trouble if you don’t discipline yourself and spend money for any other purpose that what is intended here.