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Why You Should NOT Escrow Home Taxes and Insurance | FREE Money - YouTube
Channel: Budget Bill
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what's up folks. Trell here better known as Budget Bill and today we are going to be
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discussing why you should not escrow
your home taxes and insurance and since
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this channel is all about finance we are
going to touch on all related areas this
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particular topic I have shared with so
many friends so I figured I would share
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it with my new family you guys my new
YouTube family
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quickly but nevertheless let's go ahead
and jump right into the video
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what's up folks and thanks for sticking
around so I have a question for my
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audience
now don't everyone speak all at once but
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do you escrow your home property taxes
and insurance into your monthly payment
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now since 2005 when I purchased my first
home I knew nothing about owning a
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property I didn't know much about buying
a home paying for taxes paying property
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taxes or anything but one thing I did
know was that I needed to save up a lot
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of money and make sure my credit score
was a plus so I ended up living at home
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with my parents until I was like 27
years old and I ended up saving up a
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substantial amount of money and built my
credit score to over 700 by doing this I
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knew that I would have the best chance
to buy my first home now because I knew
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nothing about the process I ended up
reaching out to one of my friends that
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was up he was pretty wealthy he was
pretty smart and savvy and he was
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definitely good with his money so I
ended up asking him to be my mentor
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throughout this whole process of buying
a home now one part of the buying
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process is that he taught me was to not
escrow on my home purchase I'm going to
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think I like about his teaching is that
he gave me all the options and the
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benefits so I could make up my own
decision based on the facts and that's
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what we want to talk about today so if
you are new to mortgages or you plan on
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buying a home soon this is what I'm
talking about your monthly mortgage
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payment is typically includes the
principal plus the amateur ization or
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the interest of the loan itself now the
mortgage company usually gives you an
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option of paying a few hundred dollars
extra per month store your escrow
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account we'll have well more than enough
money to cover your annual property
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taxes as well as your annual homeowners
insurance and then sometimes you might
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have an HOA included in that now this is
done for two reasons number one is to
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guarantee your property taxes is paid so
the city doesn't have to take a lien
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against your home and then for the
second reason which is probably to make
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money on your escrow accounts now I'm
personally not a lender nor a mortgage
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company so I don't have any hard
evidence of what they really do with
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your money in that escrow account
however I have
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hard time believing that money is
sitting for all Americans in the world
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in a checking account earning zero
interest I just find that hard to
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believe because banks are smart they are
very smart
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so I seriously doubt that but my
speculation is they are definitely
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earning interest Wow lending out a
percentage of your money of your total
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escrow account and what I mean by
lending your money out is that that's
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what banks do they have your money
that's sitting in your checking account
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or your savings account or your escrow
accounts potentially and they lend it or
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loan it out to others so that they can
make interest money on your money so the
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question is why don't you keep your
money yourself and earn interest on that
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money then you can end up paying the
bill at the end of the year yourself you
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have to pay all your other bills don't
you so why are we depending upon a bank
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to pay off your property taxes and your
homeowners insurance just do it yourself
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now be very very careful because if you
don't properly say that money including
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a little bit of extra cushion to pay the
bill when it's due they could issue a
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lien against your home and you could end
up losing it so you definitely don't
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want that to happen but that's also the
case if you don't pay your mortgage as
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well right they could put a lien on it
too so either way it goes if you don't
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pay they could issue a lien on your
house and you could potentially end up
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losing it so for context I live in a
very high property tax rate county where
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taxes for homes in my area are typically
assessed between $10,000 up to $25,000
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per year so you do the math on the
opportunity cost you could be making on
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that money before it's transferred to
the taxman so for example let's say for
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simplicity your property taxes is around
$15,000 a year now let's divide $15,000
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a year divided by 12 months which is
around 1250 dollars per month that you
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need to put into your escrow account to
cover for your property taxes and for
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that type of home your homeowners
insurance is probably going to run you
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around $3,000 per year now that's a
total of $18,000
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that's going into your escrow account
over the 12 months and perhaps your
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finance bank is potentially making
interest on your money
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my thoughts are related to opportunity
cost how much can you make if you held
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on to that money until the end of the
year or what other type of benefits can
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you receive by holding on to that money
now if you are not responsible with your
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money and you don't trust yourself to be
a holder of such a large amount of money
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until the end of the year or if you're
the type of person that gets that
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burning sensation in your pockets
whenever you come across some money then
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by all means continue to use the escrow
account method and have someone else
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hold on to the money for you because
this option is probably not best but for
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those of you who are good at managing
money good at saving good at using your
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money as a vehicle to gain more new
money then this might be for you now
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typically if you choose not to escrow
your account you have a couple of ways
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to do this on your own
number one you can potentially write a
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check at the end of the year do people
still have cheques these days I might be
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old school but I still own cheques I'm
not sure if Millennials don't even know
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what a cheque is number two then you can
also pay a lump sum at the end of the
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year using a credit card hmm now this
falls right in line with getting new
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credit cards and helping you meet the
spending requirements hell you could
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potentially get two or three new credit
cards and easily meet the spending
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requirements and pretty much get free
stuff and obviously that's depending on
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how much your property taxes and your
homeowners insurance is for the year now
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you might be wondering how is this going
to benefit me budget meal well I'm glad
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you asked one of my favorite ways is
using a high interest savings account
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there are several savings accounts that
offer you up to 17 times more interest
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on your money than your typical local
bank or your big banks such as Chase
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Bank of America or Wells Fargo so most
of the options out there are FDI insured
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and they pay in a range between 1.2
percent up to 2.0 5%
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and yes that is free money you thought I
wasn't gonna say it didn't you didn't
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you now you have these online banks such
as wealthfront etrade Citibank Ally Bank
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PNC Bank sulfide Bank and even Robin
Hood those are just the name of a few of
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the companies that offer you high
interest savings accounts on the money
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that you deposit into your account with
them and yes it is free money now it
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doesn't matter which one you choose to
invest in however I would recommend you
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invest in one that offers you at a
minimum of 1.7 percent interest APR on
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your money so using our example earlier
which was eighteen thousand dollars for
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your escrow account if that money was in
a high interest savings account you
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could potentially earn up to thirty
dollars in free money every month and
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this amount is compounded each month
now come on budget Bo let's be realistic
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on the first month you're not gonna have
eighteen thousand dollars sitting in
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your high interest savings account
because it's the first month you're just
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now getting started however you will
start accruing interest on day one for
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each month and don't forget this is free
money and then as you get closer and
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closer to the end of the year you will
be at your full escrow amount and ready
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to pay off the taxman after that it's
time to rinse and repeat nothing more
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than free money now these type of
accounts are good holding tanks for your
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money instead of under your mattress or
in your shoebox okay and it offers a
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great way to have your money working for
you so if you have any other large sums
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of money lying around this is definitely
a great option that has a low risk that
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you should consider
I've definitely considered it for myself
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and I've moved some money around from my
big banks to a couple of these options
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that I've already listed earlier in the
video well that's it folks I hope I have
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earned a thumbs up from you if it's your
first time on the channel consider
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subscribing as we discuss all types of
finance credit cards as well as real
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estate and if you found value in this
video go ahead and give us a like as it
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definitely helps out with the YouTube
career the other that I appreciate you
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watching and I will see you on the next
video
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