What goes into mortgage payment? You borrow money from a mortgage company to buy your house and then you pay it back with interest. So your mortgage payment is the principal (the amount you borrowed) and the interest, right?
Many times, mortgage companies also require you to pay a portion of your property taxes and home insurance as your mortgage payment. This goes into an escrow account, and then when the bill comes due, you don’t care because the mortgage company will take care of it for you. Easy peasy!
When I got my mortgage, I managed to get a mortgage without the requirement to escrow my taxes and insurance. My thinking was that I have good money management skills, so I could self-escrow the money. Rather than paying it to the mortgage company every month, I could “pay” it to myself and earn interest on the money. Sure, interest rates continue to be low, but this is a 30 year mortgage. I can only hope that interest rates will go up again sometime in the next 30 years, right?
I was also a little hesitant because I had recently heard a horror story where a friend’s mortgage company forgot to pay her insurance. Thankfully, it was caught before she needed it, but it scared me. Of course, stories like this are super rare, and it really isn’t a reason to avoid an escrow account.
Now, in my case, I could self-escrow and still get a good interest rate. Sometimes, mortgage companies increase the interest rate if you want to self-escrow. After all, it’s in their interest to make sure that the property taxes are paid and that the insurance is paid. They’ve got a large financial interest in the property too. But for some reason, they saw in the numbers that I was a good candidate for self-escrow.
So hooray for me! Lower mortgage payment, right? Technically. But I have to make sure that I’m setting aside the proper amount of money each month. At first, I would self-escrow by literally dividing the amount I had to pay by 12 and then putting that amount into a YNAB budget category every month. Now, I start the year by doing that, but then I also try to drop in some extra money when I have a three paycheck month or when my income tax refund shows up.
I know other people who self-escrow by having money automatically transfer into a separate account to ensure that the money is there when the bills come due. It’s all about what works best for you.
The biggest thing when it comes to self-escrow? Controlling your spending. If you are the type of person who spends money when you have it, then self-escrow isn’t for you. While I can pay my insurance bill on my credit card (and do – hooray for rewards!), my tax bill has to be check or direct debit. Well, I think I can pay it by credit card, but there’s an additional fee, something like 3%. When it comes to a tax bill, 3% is a huge amount of money and any benefit I got from self-escrow would be completely wiped out. So I have to make sure that the money is there when the bill comes due.
So think about whether self-escrow for your insurance and tax payments are a good idea for you. Call your mortgage company and see if there’s a way that you can make it work. The worst that can happen is that they will say no.