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- Some mortgage lenders include property taxes and homeowners insurance payments in the monthly mortgage payment. Others allow you to handle these on your own.
- Because property taxes and insurance can be big expenses, you may want to save for them each month throughout the year rather than simply plan for the big payments.
- I opened a high-yield savings account specifically to save money for my payments over time and to act as my personal escrow service.
When I went through the process of getting my current mortgage, the lender let me decide between paying for my property taxes and home insurance through escrow or handling those myself. I'm pretty good with a budget and I prefer paying on my own to get the added benefit of credit card points when it makes sense. Doing it on my own, I figured, would be more cost-effective.
It turns out I was right about the cost effectiveness of paying my own taxes and insurance, but managing to budget for those huge lump payments for my California home has been a bit more stressful than I expected.
That's why I opened another high-yield savings account - I chose Ally - to act as my personal escrow service.
Automatic weekly savings
My annual property taxes are around $8,000 per year and I pay another $5,500 for property insurance, which includes an additional earthquake policy. I jokingly refer to these high costs as the "sunshine tax" we pay to live in Southern California.
With some generous rounding, I decided that $250 per week over 52 weeks per year adds up to $13,000. That will get me most of the way to the $13,500 I'll need each year.
Earning interest on my balance
One of the big benefits of doing my own escrow is earning interest on my savings while automatically saving for my big payments. Property taxes are due in two $4,000 payments and insurance is a single payment.
While I'm saving, a high-yield savings account is a great choice because it pays more than 2% while keeping my funds safe with FDIC protection.
Bankrate, via Eric Rosenberg
According to the Bankrate Simple Interest Calculator, I'll save $13,140 per year, including interest, each year. That's $140 in interest at the current interest rate. Ally compounds interest daily, which helps my balance grow even faster with the weekly transfer.
Stress-free payment due dates
As a self-employed freelancer, I like to keep a good-sized emergency fund and plenty of cash on hand for anything that comes up. That includes things like preschool tuition, home repairs, car repairs, and the difference between my savings balance and my annual homeowner costs.
Because interest rates can go up and down, I'm not worried with hitting a precision number that is exactly equal to my payments. While my California property taxes are locked as long as I own the home, my insurance costs are likely to go up. So I'll need to make up some difference no matter what, and I don't care to over-estimate in this case.
No fees, costs, or escrow surprises
With the high-yield savings account, I can handle all of my banking online myself. I get all of the interest and don't have to pay any escrow fees. There will never be any surprise changes to my mortgage payment to make up for a change in rates elsewhere. For me, this is the way to go.
I also never have to worry about a minimum balance if I have to withdraw the entire balance at once, or any other recurring fee. As long as I don't need a few rare, fee-incurring activities, I won't pay anything. It will only pay me. That is exactly how a savings account should work.
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