by Doris S. Dobkins
Question: I thought it was mandatory that mortgage companies collect monies for escrow accounts. Am I really able to pay my own taxes and homeowners insurance?
Answer: It depends! Most of you should be able to pay your own taxes and homeowners insurance if your "LTV" is low enough and your mortgage company doesn't have a policy against it. If you own your home outright, you most definitely can pay your taxes and insurance directly.
Question: What is "LTV"?
Answer: Your "LOAN TO VALUE" RATIO. What percentage is your loan Compared to your appraised value? If your LTV is below 80% (Which means you have at least 20% equity) then you are usually allowed to pay your own insurance and property taxes. Each state may have different regulations so check with your mortgage company what their requirements are.
Question: Do escrow accounts pay interest?
Answer: Escrow accounts can be in either a non-interest bearing trust account or an interest bearing account. If they do pay interest, it is usually very minimal, depending on the holder. One mortgage broker I spoke with who has a $200,000 loan only makes $50 a year in interest on her escrow account. She feels she could do a lot better investing the money on her own but her LTV ratio is too high at this time.
Question: Is interest from an escrow account considered income?
Answer: Yes, you will receive a 1099 at the end of the year stating the earned interest for the year.
Question: If my LTV Ratio is below 80%, and I want to pay my taxes myself, what should I do?
Answer: Contact your mortgage company and discuss your options with them.
Question: I have a LTV ratio of 75% so I could pay my own taxes, but I'm not very good at saving and would probably spend the money. Should I still try to pay them myself?
Answer: My first response is no because you definitely don't want to get a loan to pay your taxes. But there are so many automatic investment plans that you can set up to have the money withdrawn automatically to a special fund just for property taxes and homeowners insurance.
Question: What about homeowners insurance? Do the same rules apply.
Answer: Yes, they will also look at your LTV.
Question: Can you give me an example of how much money I could earn or make by paying my taxes and homeowners insurance myself?
Answer: Given that there are 1000's of scenarios, I'll give you an example based on a $170,000 home that has annual property taxes of $2,124. If this person were to put $177 a month into a mutual fund from January 1 to December 1 of each year, at an average of 10% interest, they would make about $120 a year. If their homeowners insurance was $780 a year and they put $65 a month into the same account they would make an additional $40 or so a year for a combined interest of $160. If this money were just left each year for 20-40 years, it would accumulate from $20,000 to $30,000 over the years, depending of course on interest rates and length of time invested. Think of this as a long-term retirement plan. You'll have enough money eventually to take a dream vacation and buy a new car or whatever, and it won't cost you an extra penny to get it.
So if it sounds right for you, go for it. It can only increase your wealth. But check it out for yourself based on where you live, what you pay in taxes and insurance and what your mortgage companies policies are. It's definitely worth a $20,000 shot. :)
Remember - think long-term.
Doris Dobkins is a money saving expert, author and speaker and has helped thousands of people find ways to save money and get out of debt.
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