I think it's Dave Ramsey who suggests the envelope system as a way to not just control our spending, but to outline our saving. Envelopes are marked with headings like car payment, rent or house payment, groceries, entertainment, etc. The key is to not spend more on any one area than what's in the envelope. Is it OK if we have to occasionally? What if we spend a few more dollars on groceries? What envelope do we take the excess from? And does that mean we need to increase the amount that goes in that particular envelope? It gets kinda messy, just like an escrow account.
The biggest, and maybe only problem with an escrow envelope is that we, the homeowner, don't manage it. It's taken care of by our mortgage company. We're left in the dark, confused, and frustrated.
We can't even get someone on the phone who can explain it. None of the numbers add up - it's an equation no one understands. We eventually give up and move on... with an escrow shortage and a higher mortgage payment.
I've got a couple rental properties. I have one with escrow and one without. There are pros and cons to both.
One of the payments will never change. It's the same every month, every year. However, I get two bills a year, insurance and property taxes, that must be paid on time. The responsibility is fully mine.
The other payment fluctuates. I've seen it go up $5/month, maybe $10, and I'm not sure I've ever seen it go down. Probably won't happen. However, I don't have to worry about coming up with lump sums for my homeowners insurance and taxes. I don't have to worry about them being paid on time. I just have to worry about my mortgage payment changing.
I'm not sure which I like better. There a few ways to look at it:
If you have money in the bank and can make the taxes and insurance payments with no problem, and you're one of those people who stays on top of their bills like a hawk, then an escrow account isn't for you.
If you don't have time to keep up with your bills as it is, and/or you don't have a couple thousand dollars sitting in the bank at all times, then an escrow account is for you.
After hating an escrow account for years, now that I don't have one... I kinda miss it. It's not of the devil like I used to think. And an escrow shortage isn't as bad as it seems. Sure, we don't like our house payment going up, but an escrow shortage is basically not having enough money in the savings to pay our bills. BUT, the mortgage company steps in and pays it for us - with not charge. They're our safety net.
Not too bad after all.
Ever wondered what to do when you receive a refund because you have an escrow overage? I can also tell you how to prevent a shortage. It's easy.