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How to get rid of your mortgage’s escrow requirement

March 23, 2016 by Andrew Leave a Comment

no-escrow

A couple of weeks ago I wrote about mortgage property tax and insurance escrow accounts: why mortgage companies require them and what to do when your escrow account has a shortage.

Mortgage escrow accounts for paying property tax and insurance are a bad deal for consumers. Borrowers essentially make an interest-free loan to the mortgage company.

Thankfully, there’s a simple way to stop having to pay into an escrow account: pick up the phone and ask.

That’s what I did. I called Chase and asked them if they’d waive the escrow requirement on my mortgage. They said they’d review it and get back to me in about a week.

Sure enough, I received a letter one week later saying the escrow requirement was waived at no charge. A few days later I received a check for the amount that was already in the account.

Some mortgages are required to escrow taxes by law, but many aren’t. If you can handle the mental strain of writing one big check each year for your property taxes, this is a smart financial move.

The Psychology of Mortgage Escrow Payments

March 8, 2016 by Andrew 1 Comment

escrow Each year about this time I get an escrow analysis from my mortgage company, Chase.

Chase requires me to make monthly payments into an escrow account that will be used to pay property taxes. At the end of the year, Chase pays the taxes from this account directly the tax assessor.

The U.S. government requires certain mortgage loans to have a property tax escrow account. Even without this requirement, mortgage holders want borrowers to escrow their property taxes (and sometimes insurance) to make sure they get paid. Property tax leins can be senior to mortgage liens, so if you don’t pay your property taxes, the mortgage company can take a hit. And if you let your insurance lapse and your home burns down, there goes the collateral.

On a purely financial level, escrow accounts are a bad deal for consumers. Consumers hand cash over to the mortgage company before the property tax bill is due, rather than keeping it in a bank account where it earns interest.

From a psychological point of view, there’s some benefit to paying the money in equal installments throughout the year.

There’s another interesting psychological question around mortgage escrow, and it goes back to the escrow analysis.

At least once a year, the mortgage company figures out if the amount it is requiring for escrow is enough to pay your taxes and insurance, plus a little cushion. If your account has a deficit, the mortgage company will usually give you two options:

1. Make a one-time payment to cover the deficit.
2. Pay the deficit in equal monthly installments over the year.

Here’s the kicker: if you opt to pay it over the year, you aren’t charged interest on the extra escrow amount. If you do the one-time payment, it’s like you’re adding to the interest free loan you’re giving to the bank via the escrow account. Or, consider the mortgage company has given you an interest-free loan for the amount of the miscalculation, and it’s giving you a year to pay it back.

Unless we have negative interest rates, it doesn’t make sense to choose the first option. You should use extra cash to pay down the loan and save on interest instead, or stick it in the bank and earn a bit of interest.

At least, from an accountant’s perspective.

But there can be a big psychological value to lowering your monthly housing payments. In my home state of Texas, we don’t have an income tax. The state collects its money from citizens via sales and property taxes. Property taxes are quite high at about 2.5% of the home’s value. In my case, roughly 40% of my monthly mortgage payment goes to tax escrow.

In the case of Chase, the company provides a calculator if you want to make a partial payment on your escrow deficit. It’s an option between #1 and #2. By making a small additional escrow deposit I was able to lower my mortgage payment in the thousand column. That gives a nice psychological lift each month when the auto draft is made.

Of course, to really lower that monthly payment, there’s always the option of getting rid of escrow. More on that later.

A World with Negative Interest Rates

December 7, 2015 by Andrew Leave a Comment

interest rates Last week the European Central Bank reduced the interest rate it ~~pays to~~ charges banks to keep cash with it to -.3%.

That’s not a typo. Instead of paying interest to banks, it now charges them 30 basis points to keep cash parked with the central bank.

The idea of negative interest rates is mind-boggling.

The Economist has a good article about negative rates and the effects they have on consumers and markets.

This makes me happier with the 0.8% I earn on my savings account.

So far, European retail banks have held the line against charging their customers for keeping deposits with them. But as rates go lower, they’re finding it hard.

The deposit rate Sweden’s central bank charges is -1.1%. Can you imagine being a bank in Sweden, accepting deposits and then having to pay the central bank for the portion you don’t lend out to others?

Of course, that’s part of the point. The idea is to get banks to lend money and push borrowing rates down even further.

Cracks are starting to show, and The Economist mentions at least one retail bank that will start charging customers for deposits.

Imagine what you’d do if your bank suddenly started charging you to keep money there?

That might be the final economic — or, perhaps psychological — straw to get you to invest or spend your money.

Alternative assets like gold are loved in inflationary times. Could they also be a way to avoid paying to store cash?

Some other amazing repercussions mentioned in the article:

Companies might reverse their long-standing goal of delaying payments and pushing to keep accounts receivable down. Instead, they will want to pay quickly and delay receiving payment!
Taxpayers might over-withhold taxes from their paychecks to park cash with the government without paying fees to the bank.
People might buy pre-paid debit and gift cards as a constant store of value.

Think about it.

Don’t make these 2 mistakes when calculating your Personal Burn Rate

November 3, 2015 by Andrew 1 Comment

burnrate
If you’ve ever worked in a startup or overheard a conversation at a Silicon Valley coffee shop, you are probably familiar with the term burn rate.

Burn rate refers to how much money a startup is “burning” through each month. The burn rate lets you calculate how much time the startup has before it must turn a profit or raise more money.

For example, if a startup has $1 million in the bank and a $100,000 monthly burn rate, it has ten months to survive. It needs to make something happen before ten months is up or it will run out of money.

People have a burn rate, too. Hopefully you make more than you spend. In the startup analogy, you’re profitable. You have more cash coming in than going out, so you aren’t heading to zero in your bank account.

But what if something happened? What if you lost your job? Your business failed? You get sick? Or what if you just want the flexibility to take time off and not let money dictate your career decisions? Or you want to start a company and won’t get paid for a while?

If your income suddenly dropped, how much time would you have before you ran out of money? That’s the idea behind a Personal Burn Rate.

You need to avoid these 2 mistakes

It might be easy to figure out your personal burn rate, especially if you track your spending in Quicken or Mint. But there are two mistakes a lot of people make when calculating their number.

1. Only looking at the last month or two of expenses as a baseline. There are a number of expenses that are incurred just once or twice a year, such as vacations, furniture and insurance. You also probably spend more money around holidays such as Christmas. You should look at your past twelve months’ of spending and average it to get your monthly number. This will help you capture your seasonal and uncommon expenses. Once you get this twelve month number, just divide by twelve to get your Personal Burn Rate.

2. Dismissing a particular expense as a one-time event. “I went on an expensive vacation last year, so I shouldn’t count that in my regular spending” or “The car needed a new transmission, but that won’t happen every year.”

You shouldn’t ignore these because there’s always something.

Maybe it’s not a transmission this year, but it’s a car accident. Maybe you don’t go on an expensive vacation but have to do a house repair. Perhaps you have an unexpected medical expense.

Hopefully, looking at a year of expenses softens the impact of some of these “one time” expenses. The point is that there are always one-off expenses, even if in a different category of spending. You should include them in your overall spending calculations.

Although calculating your Personal Burn Rate is the goal, it’s handy to separate your average monthly expenses into categories. This is important as you look at ways to trim your burn rate.

I’ll discuss categories in a future post.

10 12-month CDs paying 1.0% or better

October 19, 2015 by Andrew Leave a Comment

percent-small The past several years have been dismal for savers. Many banks are paying just $1 of interest per year per $1,000 deposited.

Is it worth shopping around for higher rates? It depends a lot on how much you have socked away in savings, and how little interest your bank is paying. I searched the web to find 10 banks offering 12-month CD rates of 1.0% or better as of 10/19/15:

ELoan – 1.30% with a $5,000 minimum deposit.

CIT Bank – 1.30% with a minimum $1,000 deposit. The bank also has a high yield savings account paying 1.05%.

Synchrony Bank – 1.25% APY with a balance of $2,000 or more. The bank also offers a high yield savings account paying 1.05%.

Sallie Mae – 1.25% with a $2,500 minimum. This is the student loan group.

BankDirect – 1.21% on a $10,000 minimum deposit. BankDirect is a division of Texas Capital Bank.

Discover – 1.15%. They don’t just offer credit cards!

Ally Bank – 1.05% APY. If you think rates are going to go up sooner or you might need to pull your cash, Ally also has a No Penalty 11 month CD with a 0.87% APY.

Nationwide – 1.05%. Bumps to 1.10% with $100,000 or more.

FirstIB – 1.0% with a $1,000 minimum.

GE Capital Bank – 1.0%.

Now that I’ve done the homework for you, does it make sense to lock your money up for a year at these rates? I think it depends on the delta between the CD rate and your savings rate. At such low rates, you literally need to consider your time when it comes to opening a CD. Is it worth spending an hour opening an account, and a bit of extra time to handle the taxes, that will earn you an extra $200 a year before tax?

That’s your call.