Become Your Own Escrow

Earn interest on property taxes, Insurance Premiums and more, plus reduce their Budgetary Impacts

by FI Designer

Generally escrow accounts (or an impound account) add convenience to the borrower and provide assurance to the lender that property taxes and insurance will be paid. Officially banks aren’t supposed to make a direct profit from escrow accounts, but logic would suggest that their incentives are aligned to steer borrowers into escrow.

I think what lit the fire under me to ditch my escrow was my irritation that the sum of the escrow deposits pulled in my mortgage failed to equal distributions for taxes and insurance. Heck, I would have even sucked it up if it followed some disclosed formula for over funding a reserve. And I was admittedly unsuccessful at creating a spreadsheet that could cross check and explain the estimated deposits & distributions reported in my lender’s escrow statements.

To be absolutely honest
It hadn’t occurred to me to ask my lender if or when I could terminate my escrow account. That changed when I received a letter from my bank actually inviting me to terminate escrow. Now that was unexpected right? I was a bit skeptical of my bank offering to eliminate this service which was benefiting them, all out of the goodness of their heart.

I was skeptical
The first thing I did to ease my skepticism was to post my question to the Clark Howard Show. Much to my amazement Clark took my call on the air and told me the following things. First banks rarely offer up the opportunity to terminate an escrow account because they are huge money makers for the bank. (Clark paints with a broad brush) And if I really was being given this opportunity to stop this interest free loan to the bank I should take it. Just be sure of these two things… First confirm that there are no fees for the termination. Second, confirm that all funds already in my escrow account will be credited back to me.
After calling my bank and confirming both of those items it appeared that there were no strings attached and I would receive a check in the week following termination.

Optimization hack
After receiving the check I deposited it into a separate high yield online savings account, i.e. my “personal escrow”. This would prevent the funds from commingling with my regular savings and aid in tracking. In the beginning, for proof of concept, I only ran my homeowners insurance and property taxes through this personal escrow the same way my lender did. But after 6 months it was working so well I expanded it to also include my life insurance and two car insurance policies. I set the account to make automatic withdrawals from my checking account on the 1st day of the month.

The greatest benefit
The interest income generated by this personal escrow account is not large because of periodic withdrawals to make payments. Over the last 2 years I have made approximately $40 per year in interest. But the greatest benefit for me was that it eliminated the spikes in monthly expenses when property tax and various insurance payments were due. In effect my monthly cash flow more closely resembled a steady state. To date I only include property tax, homeowners insurance, life insurance, and car insurance in this personal escrow. At some point I may expand it to include even more one-time yearly expenses.

Tips for tracking
I found it beneficial to keep a spreadsheet ledger of how much of each monthly deposit is credited towards property tax or the 4 insurance policies in the personal escrow account. That way I know how much I have allocated for each expense when the payment is due and I’m not pulling cash that is already spoken for. This was most beneficial when I was starting out in the first year and did not have a full year of deposits in the personal escrow account to cover a particular payment. At some point I plan to siphon off some of the interest, but haven’t given it much thought yet.

Fannie Mae loan loan escrow requirements
According to the Fannie Mae servicing guide a servicer must not solicit a borrower with an offer to waive the escrow account requirements but is authorized to evaluate a borrower’s request. The servicer shall deny the borrower’s request for any of the following conditions.

  • Borrower has received a prior mortgage loan modification, or previously been approved for an escrow waiver and failed to make all payments timely, as required
  • Borrower has experienced any delinquency in the 12 months immediately preceding the request
  • Borrower has experienced a 60+ day delinquency in the 24 months immediately preceding the request
  • Principal balance for the mortgage loan is greater than or equal to 80% of the original appraised value

Call to Action
Please don’t stop here. Consider if some variation of this system could work for you. And if not, ask yourself what steps can you take to optimize around the margins?


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