Fort Collins, CO · Member since 2020 · 6 posts · 1 vote
Hey all!
On the two SFH's I own, I have the taxes and insurance wrapped into the monthly mortgage. I'm curious what common practices are and if there are any reasons why it would be more beneficial to pay taxes and insurance separately on future deals. (Or if this is a completely pointless question and it makes no difference, I accept that answer too.)
@michael king You can shop around for insurance rates with an escrow.
Having an escrow account is convenient, one bill and no need to remember to properly budget because next month is the month that taxes are due etc. Also I can't confirm but have been told that if you are doing less than 20% down payment you are required to have an escrow.
Other than the convenience factor, not having an escrow account is the better route from a strictly financial standpoint. Initially setting up your escrow account can add significantly to the amount due at closing since you need to prepay many months worth of bills in advance. I think the most they can charge is 14 months worth of taxes/insurance so depending on your rates, especially if you are in a high tax area, this could be a pretty big chunk of change. Besides adding to the upfront closing costs, it also means you aren't able to invest this money and generate some sort of revenue from it.
And while relatively trivial, by separating the bills, you can usually pay at least the insurance portion by using your credit card and auto pay, which helps rack up points or cashback. Counties usually charge a fee to pay your taxes by credit so it isn't worthwhile, but if insurance is 1k/year, then you can get 20 bucks per property worth of cashback and doesn't require any extra work assuming you actually put your credit card payments on autopay for the full balance like you should.
You could probably get a relatively safe 9% ROI on your entire escrow balance in an index fund of Utilities, as well as an additional 2% cashback on your insurance amount. So if you forgo a $4000 escrow, 3k in property taxes and 1k insurance, then at 9% ROI of the total amount, and an extra 2% cashback on insurance that would be about $380/year on average that you could generate/save per property.
At roughly $380/year per property, I'll gladly remember to take 5 minutes to go online and pay my taxes once/year.
I always pay tax and insurance separately on my mortgages. I think if you escrow insurance you don't get to shop around for rates, is that right? At any rate, I like to see where my money goes when I can.
@michael king You can shop around for insurance rates with an escrow.
Having an escrow account is convenient, one bill and no need to remember to properly budget because next month is the month that taxes are due etc. Also I can't confirm but have been told that if you are doing less than 20% down payment you are required to have an escrow.
Other than the convenience factor, not having an escrow account is the better route from a strictly financial standpoint. Initially setting up your escrow account can add significantly to the amount due at closing since you need to prepay many months worth of bills in advance. I think the most they can charge is 14 months worth of taxes/insurance so depending on your rates, especially if you are in a high tax area, this could be a pretty big chunk of change. Besides adding to the upfront closing costs, it also means you aren't able to invest this money and generate some sort of revenue from it.
And while relatively trivial, by separating the bills, you can usually pay at least the insurance portion by using your credit card and auto pay, which helps rack up points or cashback. Counties usually charge a fee to pay your taxes by credit so it isn't worthwhile, but if insurance is 1k/year, then you can get 20 bucks per property worth of cashback and doesn't require any extra work assuming you actually put your credit card payments on autopay for the full balance like you should.
You could probably get a relatively safe 9% ROI on your entire escrow balance in an index fund of Utilities, as well as an additional 2% cashback on your insurance amount. So if you forgo a $4000 escrow, 3k in property taxes and 1k insurance, then at 9% ROI of the total amount, and an extra 2% cashback on insurance that would be about $380/year on average that you could generate/save per property.
At roughly $380/year per property, I'll gladly remember to take 5 minutes to go online and pay my taxes once/year.
I know some investors who like to pay for things separately. My feeling is KISS. Personally, I love only having to worry about 1 payment every month (PITI).
On the two SFH's I own, I have the taxes and insurance wrapped into the monthly mortgage. I'm curious what common practices are and if there are any reasons why it would be more beneficial to pay taxes and insurance separately on future deals. (Or if this is a completely pointless question and it makes no difference, I accept that answer too.)
Thanks,
Erin
We have had several clients run into issues this year where escrow did not pay the insurance on time and the policy did not renew. Took the client several hours to fix it and they ended up paying higher premiums in the end.
It’s a ton simpler to budget. Imagine you have 8 or 10 months with zero property tax and insurance due and then once or twice a year you owe $15,000 in property taxes and $7,000 in insurance.
Ps. Yes, you can still shop around for insurance and change companies at any time.
What are you losing out on? $50 year in interest so you can write/or schedule 28 property tax payments and 14 insurance payments, and if you’re off once, or late once, or one payment gets lost you get a late fee large enough to wipe out your savings.
If putting an extra $1,000 or two in to escrow makes the purchase a bad deal, don’t buy.
@Jason Bott I have never heard of this occurring so I appreciate the perspective. That would be a huge issue if that slipped through the cracks. Thank you!
@Ben Zimmerman Thank you for the perspective! As someone who manages my properties on my own and has to save a huge chunk of money to put 20% on properties in my area, opportunities to efficiently save a few extra bucks are important to me.