I felt like such a grown-up walking into my new home, my hand clutched around the large white envelope containing the stack of paperwork that bound me to the three stories, two new neighbors and one acre of land that all added up to $90,000 of fresh debt and much more of a monthly payment than I had expected.
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I had a head cold that week in December, and the pounding in my skull was magnified by new terms and numbers that were introduced to me during the closing of the sale. I was 25 and was so adorably naïve.
If you own or are planning to own a home, hopefully you are familiar with the term escrow. I wasn’t. I did absolutely no research to prepare for the largest purchase I have ever made. Hopefully you will learn from my many mistakes.
The Skinny on Escrow:
A mortgage lender may choose to add the estimated costs of home insurance and property taxes to your monthly mortgage payment and deposit them into a separate account referred to as an escrow account. The reasoning behind this is that if you do not have the discipline to budget for these expenses, especially annual property taxes, the lender is put at risk. To protect themselves, these costs are collected monthly and paid by the lender when the expenses are due.
What was done was done, though, and I didn’t give the term much more thought. That is, until about a year later when I received an unexpected check in the mail, which, as I read in confusion, was due to a remaining balance in my escrow account after my insurance and property taxes were paid. Cool, huh? I certainly thought so.
Another year goes by, ending with another surprise in the mailbox – this time, not so cool. My property taxes were raised, which meant more of a monthly mortgage payment for me. It wasn’t drastic, but my single-lady budget became a little tighter.
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Year three comes to a much more financially knowledgeable Ellie (or so I thought at the time) and ends with several almost simultaneous changes. My property taxes were raised again – this time pretty substantially, my home insurance increased, my mortgage was sold to another lender, and I reached the long-awaited loan-to-value ratio necessary to drop my PMI (private mortgage insurance) – which also meant that I could close my escrow account.
I was a newlywed with big dreams who was preparing to embark on a major journey of paying off my final debt, and I was sick of receiving a letter in the mail from a third party telling me that I owed more and more money to other people. I felt out of control and uncertain of exactly where my money was going. Instead of sending my lender even more of my money to hold without interest just to pay my bills for me, I wanted direct control.
Emulating the way I went about obtaining an escrow account (winging it without doing any research), I proceeded to go about closing it. After all, it should be a simple process, right?
Wrong. So wrong.
Lesson #1: Do Your Homework
Whether you’re taking out a mortgage – any loan, actually – or debating on opening or closing an escrow account, do your homework. Just by hopping on Google, it shouldn’t take much time at all for you to learn what you need to know in order to make a choice and feel confident on how to start carrying out your decision.
I began shopping around for a new home insurance provider until I found one who offered a policy and rate that I was happy with and signed right up with the intention of canceling my policy with my current provider when I closed my escrow account. I assumed this would be a simple process. I assumed wrong.
As a reminder in case you slid past this information earlier, my mortgage had been sold to another lender about the same time that my loan-to-value ratio was reached. What this meant for me was that instead of pleasant, knowledgeable customer service representatives that I had previously talked with, I now had the pleasure of dealing with rude, incompetent, strictly-script-following call center employees.
When I made the call to ensure my PMI was being dropped and to close my escrow account, it took talking to three different people before someone even understood why I was bringing up my loan-to-value ratio. Finally, I was advised that since the lender had just recently acquired my loan, they did not have enough details available yet to determine if my loan-to-value ratio had indeed been reached.
Lesson #2: Communicate Before Taking Action
Don’t put the cart before the horse, count the chickens before they hatch or take part in any other similar idiom. When it comes to mortgages, no process is as simple as you assume it should be. If you stray from the script that the lenders’ human robots have been trained to follow, you will be met with confusion, multiple transfers and long hold times in hopes that you will just give up. Discuss your plans with your lender beforehand and follow their proper procedures when moving forward.
One month, one mortgage payment (including escrow and PMI) and one separate home insurance payment later, one of my incessant phone calls finally rang the phone on the desk of a gentleman who was far too intelligent to have settled for employment by my mortgage lender. He told me that it had been recognized that my loan-to-value ratio had been reached and provided me with a timeline of resolution. I was advised that at the end of that timeline, I would receive a check for the amount of PMI that had been overpaid, as well as the contents of my escrow account.
This scenario played out precisely. I received my check, used it to finish funding our emergency fund and set up a monthly sinking fund to prepare us for the new responsibility of paying our property taxes.
Our monthly mortgage payment became the nice, constant, predictable combination of principal and interest that I had desired. Our low monthly home insurance rate was now automatically withdrawn from our checking account every month. Birds chirped and angels sang as I walked into the courthouse on a crisp February afternoon to pay my own property taxes for the very first time. I swelled with pride when I was handed the receipt that symbolized my handling of this very grown-up responsibility.
I wish that was the happy ending to my story, but my learning experience was not yet complete.
In June, I received a letter in the mail from my mortgage lender stating that the property taxes on my home were delinquent; therefore, a new escrow account would be set up. I rolled my eyes and mentioned a few choice words when showing the letter to my husband. We scanned the property tax receipt and sent it to the email address provided by our lender.
Two follow-up emails were sent to the lender in the next couple of weeks that went by without a response, which I attributed to the consistently disappointing service provided by their Customer Service department. I assumed that if there were any further problems, they would let me know.
Again, I assumed wrong. Logging into our bank account after our standard mortgage payment was made earlier this month, I noticed that next month’s mortgage payment amount was over $250 higher than normal.
A new escrow account had been opened with the intent of collecting over $500 that my lender had paid out in city property taxes, as well as to collect this year’s county and city property taxes in a four month period.
Lesson #3: Know Who and What You Owe
You may be responsible for both city and county taxes. If so, these will be paid separately.
I only paid our county taxes, not our city taxes. I never even thought about it. I assumed I was paying both when I went to the courthouse. If we received a notice in the mail from the city, I must have disregarded it as a water bill and not even looked at it (we are set up on budget billing so our bill is the same each month).
I felt so dumb and ashamed of myself for not paying such an important bill. These feelings were amplified when my offer of sending a check for what we owed the lender so that we could move forward without opening another escrow account was refused.
After all has been said and done, we now have an escrow account for our property taxes and continue to pay our home insurance directly. As frustrated as I was, feeling like all the work I did to close our escrow account was in vain, it is just more fuel to the fire of our desire to pay off our mortgage as fast as possible.
Now on the other side of this experience, I still recommend closing your escrow account if you are disciplined and desire direct control over where your money is going. Just, please, learn from my experience and mistakes.