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Old 08-20-2008, 09:24 AM
 
792 posts, read 3,824,283 times
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Hi,


I was wondering if I should open an escrow account where they charge me prepaid costs of almost $3,500? Or is it recommendable to pay for your own taxes and insurance?
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Old 08-20-2008, 09:32 AM
Status: "Pearlander" (set 4 days ago)
 
Location: Pearland (Southern Trails)
470 posts, read 1,393,944 times
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My opinion: If you can afford to pay the required 20% down payment to opt out of escroe, you should do so. By avoiding escroe, you avoid paying the extra monthly costs for taxes, insurance, etc. Instead, you get to keep this money in your own interest-bearing account, to be withdrawn when the bills come due (usually annually). Your mortgage company is going to draw interest on your escroe account anyway, so why not avoid them and earn the interest for yourself?
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Old 08-20-2008, 09:36 AM
 
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Hi Timnwendy!

Thanks for your prompt resply. I will not be able to put down 20%, but I will be putting down around $10,000.

So, if I dont open an escrow account, this will reduce my costs in closing right? However, I will then have to pay my taxes and insurance separately.
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Old 08-20-2008, 09:43 AM
 
Location: Houston
57 posts, read 379,133 times
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Quote:
Originally Posted by marykate1 View Post
I was wondering if I should open an escrow account where they charge me prepaid costs of almost $3,500? Or is it recommendable to pay for your own taxes and insurance?
I doubt they really charge you $3500. What's happening is they are going to require require you to hand the money to them to fund your escrow account so that at the end of the year (four short months from now) when taxes are due there's money to pay them with. The seller is really going to chip in some of the amount at closing (it will be reflected in the settlement document you get at closing) to help fund their share of the taxes (from Jan 1 up to now).

If you do not give them the $3500 because you don't set up an escrow account with them, then you should be putting the $3500 aside anyway. It's not like you can go buy a big-screen TV with it.

Banks require escrow accounts on loans because they fear that the homeowner will take the tax money and buy that big-screen TV. At the end of the year, there's no money for taxes - the homeowner walks away and the government siezes the property. Banks HATE that.

You can discuss with the bank what terms would be required for a no-escrow loan. It's negotiable. There are pros and cons with escrow. I do NOT escrow. But that doesn't mean you shouldn't.
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Old 08-20-2008, 09:45 AM
 
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Thanks hammer2000!

I will definitely negotiate and see what the benefits are.
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Old 08-20-2008, 09:54 AM
Status: "Pearlander" (set 4 days ago)
 
Location: Pearland (Southern Trails)
470 posts, read 1,393,944 times
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It depends what you mean by "not opening an escroe account". If you don't open it, it means you delivered a check for 20% of the purchase price right then at closing. So in that respect, you are NOT lowering your closing costs, you are adding to them.

Edit: The 20% downpayment is a typical level for opting out of escroe. That is not a hard and fast rule. As was stated, it is all negotiable with your lender.
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Old 08-20-2008, 09:59 AM
 
Location: Houston
57 posts, read 379,133 times
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One thing to keep in mind - an Escrow Account is not a permanent feature of a loan.

If you do begin to escrow, as time goes on and your equity increases, the bank will be more likely to allow you to self-escrow. If it is turning out to be a hassle, you can change it then. Some people find they like to escrow because it eliminates this monster bill that comes due right around Christmas time. (OK it doesn't eliminate it, but it gets rid of the all-at-once shock factor.)
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Old 08-20-2008, 10:03 AM
 
Location: Katy, TX
1,288 posts, read 4,392,311 times
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I've owned three houses...the first one we escrowed our taxes, the second one we decided not to, and the third one we did again. I found it just easier to increase my monthly payment to include my taxes instead of saving it up in my own bank account and paying it in a lump sum once a year. If you are SUPER vigilant and want to make that 2% interest or whatever on your own money, don't escrow. But to me it wasn't worth the hassle not to.
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Old 08-20-2008, 10:04 AM
 
Location: Right where I want to be.
4,507 posts, read 7,823,618 times
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If you don't put down 20% it may not be something you can negotiate. I have never heard of lender who would make escrow optional with less than 20% down...but, maybe they are out there.

If you do get an escrow account with your mortgage make sure you know what will be required to get out of it later (if you want to).

As for my personal opinion on escrow accounts for taxes and insurance...I will never do one again. Never did they work as they should have resulting in countless hours of trying to straighten it out. One year taxes were paid for our neighbors lot (from our account) instead of our lot and we were hit with late fees for taxes. The constant notices of 'overcharge---undercharge' on the escrow accounts were annoying at best, troublesome to the budget as well. If you can manage your own money at all, you can pay your own taxes and insurance and forget about the escrow account.
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Old 08-20-2008, 10:19 AM
 
Location: Houston
57 posts, read 379,133 times
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We paid more than 20% down on our first home loan - and the bank still required escrow. I hated it.

First, our loan kept getting sold from one bank to another. So the taxing jurisdictions could never keep straight where the bill should go. I kept having to get involved to get that straight.

Also, some banks preferred to pay the HOA fees from escrow, some did not. The HOA fees therefore kept getting screwed up because once we got the right billing address we discovered that the bank did not pay HOA out of escrow. But then the next bank that bought the loan... well, they wanted to.

Hassle. When we refinanced, we told our bank no escrow and they didn't care. Of course, we had high equity by that time...

Potential interest on the money was never an issue for me. Not enough to worry about. The hassle was the main factor.
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