One of the options offered during a refinance is whether to roll your annual property tax and insurance bill into the monthly mortgage and interest payment (known as a PITI) or to pay these items separately. There are advantages to both kind of payments.
The advantage of a PITI payment is that instead of the borrower paying a huge property tax and insurance bill in June and again in December, the mortgage holder will collect 1/12th of this bill each month along with the principal and interest. When the bill is due, the lender will make the payment. This is a great system for people who don't have the discipline to sock away money for taxes and insurance each month.
Even though this system is popular among many homeowners, I prefer to pay my property taxes and insurance separately from my fixed-rate mortgage payments for a number of reasons. Here is why.
Guarantee that payment is made. Back in 1977, a mudslide caused tens of thousands of dollars of damage to my parent's new home. Since the mortgage company had "forgotten" to mail in the premium payments, the damage wasn't covered under their insurance policy. (A disclosure in tiny print at the bottom of the mortgage note waived any bank responsibility). Mistakes like this do happen which is why it's up to the homeowner to verify that the taxes and insurance payments have been made. This is best done by making the payment in person and getting a receipt.
I keep the interest earned. Instead of paying $650 a month into a bank escrow account where it doesn't earn interest, these funds are sitting in one of my money market accounts where they are generating some interest income. I've also taken to converting some of these funds into 3 month CDs at my credit union, which are timed to mature a week before the taxes are due. Three month CDs pay between .25-.35% a month and carefully managed, will generate up to $100 in interest every 6 months.
Can be drawn against in case of an emergency. In the event of a medical emergency or some other crisis that requires more cash than what's in my checking account, I can always "borrow" from my tax and insurance savings account if necessary. The challenge of course is replenishing the money before the tax bill is due; since my income usually comes in waves, this isn't a problem for us.
No surprises. The money that goes into an impound account is based on the previous year's tax and insurance bill. If the taxes or insurance rates jump significantly, you'll find your payments increase as well or worse yet, the mortgage company charging double TI payments until the deficit has been caught up. Taking charge of your own tax and insurance bill means that your mortgage payments will always stay the same.
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