Spending $13,000 a year on property taxes and insurance used to be overwhelming, but my high-yield savings account makes it simple

Eric Rosenberg

Jan 28, 2020, 02:14 IST

Spending $13,000 a year on property taxes and insurance used to be overwhelming, but my high-yield savings account makes it simple

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The author is not pictured.

When setting up my home loan, I opted to manage my property taxes and insurance on my own instead of rolling a monthly escrow payment in with my mortgage.
Paying my own taxes and insurance allows me to earn interest on my funds throughout the year, but making three large payments every year added unwanted financial stress.
A dedicated high-yield savings account is the perfect way for me to save a little bit every week and manage my own virtual escrow account for free.
Find out which high-yield savings account has the best interest rate right now »

If you own a home with a mortgage, you may be familiar with escrow accounts. Escrow is a service provided by banks and other lenders to help you manage required property taxes and insurance for the property secured by the loan.

Instead of rolling these fees into my mortgage payment through an escrow account, I opted to handle these payments myself instead and learned some important lessons along the way.

Here's an inside look at how I use a high-yield savings account to manage my own escrow needs.

What is an escrow account for property taxes and insurance?

Escrow accounts are a type of savings account tied to your mortgage. With escrow in place, you make additional payments on top of your mortgage every month. The lender saves the extra payments throughout the year and uses the funds to pay for your property taxes and homeowner's insurance when due.

This is a great service in theory, but there are some downsides. First, if you don't pay escrow it is considered an underpayment of your mortgage. That would be bad for your credit. Second, the lender may charge for this service. Third, you probably won't earn any interest on escrow balances. If you do, the rate will probably be pretty low.

Escrow certainly does make your life easier when managing taxes and insurance for your property since you have just one bill to pay, but it wasn't quite right for me.

Why I skipped escrow for my mortgage

I figured I could easily pay the bills myself and skip escrow to avoid the above pitfalls when given the choice by my lender. With my three prior mortgages, I always had the lender handle my escrow needs, but I decided this time that I could handle it.

Doing it myself gives me a lot more control over the process: It allows me earn interest on my balance, avoid any fees, and avoid changes in my mortgage payment when taxes and insurance go up and down (though they seem to only go up) over time.

My high-yield savings account makes big bills less stressful

I handled this fine for the first year and a half of owning my home, but it wasn't always as fun and easy as I expected. I figured that having irregular income would make it easier to manage irregular bills, but they always have a way of sneaking up on you.

My California property taxes are about $8,000 per year for my home, which is broken up into two payments due in November and February. My property taxes also include an additional earthquake policy, because California, which totals another roughly $5,000 per year due in the spring.

The $4,000 and $5,000 payments were harder to budget for than I expected. I sat down with my wife to chart out a solution. We decided to save $250 per week in a high-yield savings account so we wouldn't have to raid our emergency fund or other savings to make these payments.

This setup lets me make money instead

Throughout the year, the balance of my dedicated account at Ally Bank ebbs and flows. I steadily add $250 every week, and I use the account to pay my property taxes directly. I pay my insurance with a credit card and transfer cash from my "escrow savings" to my checking to pay the bill.

I earned about $50 in interest on the account last year, which is pretty good for virtually no work aside from setting up automatic transfers. While $50 isn't life-changing money, I'd rather have it than not!

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