Many mortgages come with an escrow account. Escrow accounts are like forced savings plans. Every month when you pay your mortgage, you also pay a set amount of money, determined by your bank, into the escrow account. The escrow account's money gets used to pay your property taxes, homeowners insurance and, if required, your private mortgage insurance. However, the lower the expenses covered by your escrow account are, the smaller your escrow payment will be.
Reducing Property Taxes
Your property tax bill is based on the tax rate that your local government sets and the value that it assigns to your property. While you can't do much about the tax rate, most communities will let you dispute the value that gets assigned to your home. If your value is too high, contact your community's tax assessor and find out about the dispute process. If you can bring your assessed value down, it'll bring your property tax bill down and reduce your escrow account.
Reducing Homeowner's Insurance
Shopping around for new homeowner's insurance can save money and reduce the escrow portion of your payment. Different insurers frequently charge wildly different rates for the same coverage, and switching from a high-rate carrier to a low-rate one may cut your premium in half. While you're shopping around, talk to your insurance agent about adjusting your coverage as well. If you have safety equipment like a fire extinguisher or a security system, you should be able to get a discount for it. You can usually save even more money by increasing your deductible.
When you take out a low down payment loan, your lender will usually require you to make extra payments for mortgage insurance. The mortgage insurance protects your lender from the risk that they are taking by making a loan on a property with very little equity. As your property goes up in value or your loan's balance goes down, you may reach a point where you no longer need the mortgage insurance. You can generally cancel private mortgage insurance (PMI) when you have 22 percent or more equity in your home. Unfortunately, the mortgage insurance premium (MIP) on FHA mortgages is subject to different rules and may not be cancellable under any circumstances.
Managing Escrow Accounts
You may also be able to reduce the size of your escrow account by managing it more aggressively. By law, your lender can only keep a two month cushion in the account. If you think it's taking too much money from you and overfunding the account, request an escrow analysis. If the lender finds that your escrow account payments are too high and leading to overfunding, your payment will be reduced and any overage that you've already put in will be sent to you. You may want to request an escrow analysis a month or two after you lower your property taxes or homeowners insurance just to make sure that your lender picks it up.
- NW Plus CU: Understanding Payments & Escrows
- Kiplinger: How to Appeal Your Property-Tax Bill
- Insurance Information Institute: 12 Ways to Lower Your Homeowners Insurance Costs
- State of Hawaii: Homeowners Premium Comparison January 2013
- Nolo: Getting Rid of PMI (Private Mortgage Insurance)
- The Mortgage Reports: How To Cancel Your FHA Mortgage Insurance Premiums (MIP)
- U.S. Department of Housing and Urban Development: FAQs About Escrow Accounts for Consumers
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