when your budgets tight

December 4th, 2007

When Your Budget’s Tight…

Small changes in your monthly expenses make a big difference. Yet another reason to get out of debt as soon as possible.

Last night I got a letter from our mortgage company. Apparently over the past 10 months that we’ve owned our house, we have been underpaying into our escrow account, because they underestimated our property taxes by about $300 per year. So as of February 1st, not only will our mortgage payment rise because we’ll be paying another $25 into our escrow account every month, we need to make up the shortfall from last year plus a little bit to raise our minimum amount in our escrow account to the amount required by law (2 escrow payments must be there held in reserve at all times according to the letter).

We get two choices on how to make up the shortfall. Either in the next ten days, we send the mortgage company ~$400, or we add another ~$33 to our monthly payment for the next year on top of the $25 it is rising already. Bringing the grand total to a $58 increase per month.

Well, I was none too pleased when I read the letter. At first I panicked, and then I settled down a bit and realized that we had options. I already snowflaked our windfall to debt (more on that in the Tell All Tuesday post later today), but our emergency fund of $1000 is intact (it is actually $1267 right now due to some of the extra paycheck not being spent) and if we needed to pay the escrow shortage now, we could.

We don’t know a whole lot about this type of stuff, so feel free to leave a comment correcting me, but it seems from the letter that paying for the shortfall over twelve months is the best option. We aren’t charged interest on our escrow account, and the monthly payment addition is exactly 1/12th of the total shortfall, so it seems like it is kind of like an interest free loan we pay off over 12 months.

I am so sick of debt I just want to pay the shortfall to make it go away, but it seems more prudent to just have our monthly payment increase to cover it and see where we are next year. At least we have options. Thanks emergency fund. But the increase in payments really stinks. Time to try and tweak the budget even more, and I hope my tutoring job starts soon. Really soon.

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29 Responses to “When Your Budget’s Tight…”

  1. I think you have the right idea. This happened to my wife and I last year, but it ended up being over $100 per month total. We decided we would work it into our budget and add to our escrow over the course of the year.

    If you can afford to do the same thing, I would recommend doing that. You don’t earn interest on the money you have in escrow, and it doesn’t do anything for you other than ensure there is a bundle of money to cover your annual taxes and a partial mortgage payment. You may as well let the money you have work for you.

  2. Given the same circumstances, I would pay it in a lump. Here’s why:

    We financed our daughter’s braces over the past two years interest free. I could have paid the lump but it would have decreased our emergency fund. I was looking at the same dilemma you are.

    By making monthly payments, all I have been able to think of over the past two years is how I’d spend that money differently every month. It was a matter of “opportunity cost” that I didn’t figure in when I saw that the loan was interest free.

    If I had it to do over again, I’d make two fifty percent payments, one each year of the orthodontic treatment.

    Another thing to consider is that your taxes go up every year. Your homeowner’s insurance goes up every year. There will be no point when the amount you’re sending to your mortgage company will go back to being what it was before the escrow shortage. That’s just the way it is with owning a home. (Yeah, I think it’s worth it.)

    Your mileage may vary. :)

    Sally

  3. This has happened to me twice since I’ve been a homeowner. When I first got the notice, I panicked too but then realized it was no big deal. Basically, I chose the increased payment option and worked it into my monthly expenses. I refused to give them more of my money than I absolutely had to. Especially, since I do not earn interest on the money and it is not reducing my principal balance.

  4. I know things will continue to go up every year – in fact, that is another reason I was leaning towards the pay over 12 months thing. It would adjust us to a higher payment and *maybe* next year, our payment wouldn’t go up more than our adjustment was.

    I don’t know. i am still pondering. Thanks!

  5. Not only should you not be charged interest on your escrow, I believe you should be EARNING interest on your escrow – that money is supposed be set aside into a separate account that should be earning interest equal to a savings account.

    About 8 years ago, we started managing our own escrow acct. We opened a new savings account, figured out the appropriate expenses (and added what we felt should also be included – A/C maintenance, termite inspection) – divided it by 12 and I make sure the payments are transferred on the 1st of the month.

    I worked for a bank for 16 years – I don’t trust them enough to manage my taxes – they always paid them too close to the “late” date for my comfort.

    We also tend to stash any “found” money into this account to cover any increases that may occur – by doing that, we’ve kept our monthly escrow payments the same for 3 years, even through tax increases.

    Thanks for the great post! Have a great day!

    Susan :)

  6. Both sound like good options. It’s great that you have the emergency fund to give you a choice. I don’t know much about escrow either.

    If you pay it off in one lump, then maybe you can make the 12 monthly payments back into your emergency fund and feel really good about it. Vs. making 12 small payments out of your cash. It’s a thought.

  7. Hmm… I didn’t even know I could manage my own escrow account. It was presented to us like if we had a mortgage, we had to have an escrow account with them. Huh. I’ll have to look into that.

  8. Same thing happened to us because the town decided to roll the Fire tax into the real estate tax. We were around $360 under. I made the decision to roll it into the mortgage over the next year. This makes it easier on the savings then one lump sum.

  9. Ugh. I know just what you’re going through. Last year our property taxes and insurance raised $250/month and we thought we were going to die LOL. Good luck!

  10. This happens sometimes. A couple of years ago, we got hit with a $2000 shortfall. I called the escrow company and cried to them that we couldn’t make up that much in one year, so they allowed us to spread it out over three years, reducing the payments considerably. Of course, the following spring, they did another recalculation, and wanted it all in a single year again. By that time, it wasn’t particularly a problem.

    Here’s the thing. It’s not a debt. Don’t call it a debt. This is money you need to save in an account that belongs to YOU in order to pay taxes. You don’t owe it to anyone. I would not pay it in a lump sum. Just pay the extra $25/month and forget it. It’s not much. If you own a house long enough, someday you’ll get a surprise check from the escrow company, because they took too much.

  11. I don’t have a mortgage, but I pay someone else’s bills for them, and this is a problem that occurs *every* year because property taxes are raised every year. He has a mindset that he doesn’t want his monthly mortgage payment to go over X dollars per month. If he let them increase the escrow it would go over X. He prefers to pay the lump sum for both the shortage *and* the increase and then just have his fixed X dollar mortgage payment.

    Another way you can “lower” the mortgage is to take the taxes out of the escrow and pay them yourself. Depends on how the mortgage is written – the mortgage company may require that they pay them. He has one house where the taxes are included in the escrow/mortgage and another house where he pays them himself.

  12. @aidelmaidel – I was prepared for the idea taxes would go up, but I didn’t realize it would be sort of retroactive. I guess I thought they would know what the taxes were for the year they were paying. heh. I am sure it will just get worse. heh.

    @Catherine – I need to get over my midset that every time I owe something money it is debt. i know this isn’t the same… it just “feels” the same if that makes sense. it feels like I owe someone.

    I’ll get over it I am sure. Tomorrow. :)

    thanks!

  13. Personally,

    I’d take advantage of the interest free loan. But if available, I’d opt for canceling the escrow account entirely and having my own escrow account.

    It’s not hard, and as many have said, doing so allows you to capture a return on the escrow funds. A modest return of course, but a return nonetheless. If taxes and insurance are $3,500 annually, and an online MMA is paying 4.75%, your basically losing $83 per year by having the bank manage your escrow instead of you ($3,500 x 50% x 0.0475.) There’s no management to it; you’re paying it in to the bank every month now, by doing it yourself you pay the principal & interest payment to the bank, then “pay” the escrow amount to your savings account (maybe a totally separate savings account to avoid mingling funds.) Further, this gives you the freedom to pay the insurance with a credit card and capture rebates/points and reimburse yourself with your savings. It also allows you to time your RE tax payments if prepaying in December would be beneficial in an instance when you were able to itemize one year but not the subsequent year. In terms of annual increases to taxes & insurance, your guess is as good as any – the bank obviously made a wrong guess or you wouldn’t be facing the present situation. At the beginning of each year, you could just increase the amount set aside by 10-15% in hopes that would cover the increases.

    Ultimately, I agree with one of the previous posters – it’s my money, I’ll hang on to it as long as I can thank you.

    And if you don’t have the option to escrow yourself or are still not interested, I’d still take them up on their offer for monthly payments. I’d take the cash you have available now, pay it in full into your own savings account. Then, each month, if you have the funds available in your typical cash flow, I’d pay it from that. If you’re short that month, I’d withdraw that amount from the deposit you made into savings.

    Take Care. Love reading your blog.

  14. Seriously – I had NO IDEA one could even manage their own escrow account. I don’t know if I can or not. But it is definitely something I am going to be looking into in the near future. It was presented to us that with the mortgage there was an escrow account and we didn’t have any choice in the matter. I am going to investigate this.

    Thanks!

  15. You should also find out what interest rate you are earning on your escrow account. Before deciding to manage it on your own, calculate how much they pay versus a high yield savings. Figure your return for doing it yourself.

    I would also take the interest free loan!

  16. I hate to ask dumb questions but what is an “escrow” account with respect to a house?

    Mike

  17. Mike you canuck you! lol

    I guess this is a US concept not a Canadian one.

    Every month I pay my mortgage to my mortgage co but I also pay 1/12th of what the taxes and insurance on the house is to them. they hold it in an escrow account, and when taxes are due or insurance is due, they pay it.

    So say my mortgage is $700/month and my taxes/insurance are $2400 combined a year, every month I pay $900 to my mortgage co and they put $200 of it in an escrow account and disburse it when necessary.

    Apparently having this account with your mortgage holder may be optional – I thought it was required but apparently not for everyone. I have been researching it off and on all morning/afternoon and I am still not sure if it is required for me or not. I might have to just actually call someone. lol

  18. This same thing happened to me too. Our house was new construction and so the first year the taxes were ridiculously low because it was based on the land only, not a house. So the second year, when our taxes jumped up to include both house and land, we were hit with a huge shortfall and our mortgage payment was upped over $100/month. I chose the 12 month option rather than the lump payment because we just didn’t have that much cash. We’re nearing the end now of that shortage and I’m curious to see what my new payment will be for January.

  19. Wow, this must happen a lot. It happened with me recently but due to an underestimate of my insurance, but I only owed $93 so I just paid it off. I think if it was a high amount I would’ve done it month by month. For $400, I might pay that all off at once especially if the money is in the emergency fund–that way you don’t have to think about it.

  20. That just happened to us, only the letter originally said our monthly payment would be going down $50 next year. But, upon closer examination, they didn’t use the correct numbers for our property taxes, so when we called them on it, turns out ur mortgage is going up $20.
    We got our property tax statement in the mail a few weeks ago, so we were able to compare it to what the mortgage company was saying our property taxes would, hence we caught the error.

  21. I have a feel good story about my escrow. I have owned my house for 6 years, and about every other year, they send me a letter saying my mortgage is either going up or down due to escrow. As of Nov.1, my mortgage went down by 12 dollars/month because of overpayment. I think one time they even sent me a check. woohoo! That went right back to my student loan, because I obviously didn’t need the extra 100 bucks in my hand.

    I’m not sure why my taxes/insurance fluctuate so much but they do. I would pay it in monthly payments because it makes it easier (for me) than paying out a huge chunk at one time. I have never heard about maintaining my own escrow, but it’s easier if the bank handles it from my standpoint. It’s one less thing I have to worry about.

    Good luck with your decision. Even if you start paying the monthly payments, the bank certainly won’t mind if you pay a big chunk if you change your mind.

  22. My mortgage payment changes depending on the amount of property tax owed and what the town’s tax rate will be. Some years it goes up, some years it goes down. That is the way it is where I live

    Even if I put in the excess to cover the escrow, depending on how taxes are calculated, I could end up with either an increase or decrease depending on what the town’s rate becomes, the next year. I try to pay attention to the town tax rate and figure out if it will affect my escrow payment. I’ve only had two increases in 7 years, once for $6 and once for $12 each month. I’ve also had a couple decreases by almost the same amount.

  23. Thanks for the good stories about the whole escrow thing as well as the not as great. I’m feeling okay about things, not great but okay. I HOPE next year we are in such a better place financially that I don’t have to obsess about a small deviation from the budget. I hope.

  24. Your lender probably requires you to have an escrow account if your equity in your home is below 20%. If your equity is above 20%, you would probably save money by paying your property taxes and insurance yourself as there are probably hidden fees in maintaining that escrow account. You just have to make sure and save enough money each year to pay your tax bill.

  25. PT – Thanks for the explanation.

    We actually have something sort of similar in Canada. When you get your mortgage you can combine the property tax with the mortgage payment which is essentially an escrow situation although I’ve never heard the term here.

    Not sure if they will include the insurance payment or not. I’ve never done it since it seemed like they always wanted to take too much, although it would cut down on the number of bills to pay.

    Mike

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