What happens to your money if you overpay into your impound account?

[Coronita]

Does anyone know what happens if you overpay into an impound account for your mortgage?

My lender I think allows me to make additional payments towards my escrow account for property tax/insurance purposes. But I don’t think there are any restrictions into how much you can pay into that account.

Is the money in the escrow account insured?

Here’s what I’m thinking.

I have $75k left on my mortgage that will be done Sept 2018 (in less than 3 years). The remaining interest on the loan about comes out to be about 1.18% annually for the remainder of the 3years.

Instead of paying off the $75k now and saving in 1.18% interest charges, what’s to stop me from moving $75k into my loan’s impound account, where CA state law requires a 2% interest to be paid on the impound account?

Thoughts?

[Coronita]

I guess the one drawback is if I still have an outstanding loan for this primary, it will reduce my borrowing capacity in case I want to buy another primary home, versus if I have no loan.

[Hatfield]

I think your bank is going to do whatever it needs to do to avoid paying you 2%.

Years ago I had a mortgage that I was making overpayments on. I hadn’t noticed, but the bank was mistakenly applying the extra money towards the impound. After some months they caught it and cut me a check.

[NotCranky]

My experience , case of 1, they will cut you a check for excess funds in the account ,with or without you asking for it.

[HLS]

Flu,
The interest rate on your note is your interest rate.
I don’t think that you have a 1.18% rate.

Where did you see that a servicer must pay you 2% ? Interest is required to be paid in 15 states,
(Including CA) but I’m not aware of a minimum %.

I doubt that any servicer would allow that type of money to sit in an impound acct very long.
They would most likely return it to you.

[Coronita]

[quote=HLS]Flu,
The interest rate on your note is your interest rate.
I don’t think that you have a 1.18% rate.

Where did you see that a servicer must pay you 2% ? Interest is required to be paid in 15 states,
(Including CA) but I’m not aware of a minimum %.

I doubt that any servicer would allow that type of money to sit in an impound acct very long.
They would most likely return it to you.[/quote]

1. If I have $77k left on principal, and $2750 total interest to pay during those 3 years, then isn’t

77000*(1+r)^(3)=$79750

or r= (79750/77000)^(1/3) – 1 or 0.0118?

Please correct me if this isn’t right.

2. It’s 2% for CA escrow accounts

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwjxlunOpa3JAhVIMogKHVN5BvkQFggmMAE&url=http%3A%2F%2Fwww.city-data.com%2Fforum%2Fattachments%2Fmortgages%2F60986d1270780876-bofa-bank-america-203k-rehab-loans-interest-requirments-state-2-state.pdf&usg=AFQjCNFv03qcBFyS0xCQrtZpNqYSBlTcbQ&sig2=KHyNs3ZjBcomEsJnz4Y9pA

———————–

Unfortunately, someone already thought of this…
Hence:
http://www.bankrate.com/finance/mortgages/mortgage-escrow-account-investing.aspx

“The Real Estate Settlement Procedures Act, or RESPA, limits the amount of cushion in an escrow account to a maximum of one-sixth of the total escrow charges for a year, and that’s at the lender’s discretion.”

[HLS]

With your calculation, you are just averaging your remaining interest expense over 3 years.

Don’t forget that you are paying interest on a declining balance each month.

If you go to an amortization website that shows a breakdown you will see exactly how much your interest expense is.

The interest that you paid this month is much more than the interest that you will be paying next year.
Your payment is the same so more will go to principal.

Does this make sense ?
Each month your interest portion of your payment is based on the principal balance for the previous month.

[Coronita]

[quote=HLS]With your calculation, you are just averaging your remaining interest expense over 3 years.

Don’t forget that you are paying interest on a declining balance each month.

If you go to an amortization website that shows a breakdown you will see exactly how much your interest expense is.

The interest that you paid this month is much more than the interest that you will be paying next year.
Your payment is the same so more will go to principal.

Does this make sense ?
Each month your interest portion of your payment is based on the principal balance for the previous month.[/quote]

I understand that. But I was looking at it from the perspective of if it made sense to pay if off the $75k now or not. It seems like if I pay if off now, I’m saving only $2750 in interest charges that is spread over 3 years and that gradually amortizes down. But if I leave the $75k in a X% return account (at least) for the next 3 years, it’s still better than paying it off right now.

I guess my real question is starting with $75k in some investment, how do I find the rate of return X% needed in order to “break even”, if I plan to withdraw from that $75k monthly to pay the remaining mortgage. I was thinking 2% was more than enough.

[HLS]

I understand what you were thinking..
What is your note rate ?
**That is your cost of the money.

(If you could make 2%, would you get a 1099 and have to pay taxes on it, netting much less?)

If you just want your mortgage out of the way, pay it off.
Depends what your future plans are.

I’m sure your credit is great. You will always have access to cash at some rate.

I have dealt with many people who are house rich and cash poor. They were in a rush to pay off their house and ran in to trouble because they lost their job and/or can no longer qualify to refi and take money out for one reason or another.

I’ve met people with lots of equity in their home who don’t sleep well at night because they worry about their cash flow.

I’ve also had people tell me that they sleep better at night with a nice cash cushion in the bank even though they have some debt that they could pay off if they wanted to.

It’s not a matter of right or wrong; it’s what you feel is right for your situation.

The wild card is that nobody knows what their future holds.

There are virtually no risk free investments today that will beat your mortgage rate, net after tax.
(With some risk there are lots of options)
**********************************
Another way to look at it is:
If you pay it off now and give up $75,000 in cash,
your guarantees are:
1) No more monthly payment of P&I
2) You will not have to pay $2750 interest over the next 3 yrs
***********************
If you can invest the money correctly, you may be taxed on the income that it generates, so you will need to receive a much higher rate than your note rate just to pay the interest and be even.

[HLS]

PS;
You might need a pre-tax 4%-5% return to have it make sense to not pay off your mortgage if that’s your only concern.

Another factor for anyone considering paying off their mortgage,
depending on your Schedule A itemized deductions,
without mortgage interest expense, the standard deduction may be larger than property taxes & state income taxes and it could make the net result even more attractive.

[gzz]

Flu, I agree with HLS’s comment, you are not calculating interest right to come to that figure. You are charged based on your current balance, and in a year that balance will be lower. But you are assuming a stable balance over three years to get that 1% rate.

I’m guess your note rate is about 2.2% and is tax deductible. I’d invest that rather than do an early payoff.

I also am lazy and like the autodebit of my mortgage and having them pay taxes and insurance. Sounds like a payoff and setting up new ebills would take a solid hour of my time, better to do that in 3 years rather than now.

[HLS]

The tax deductibility of a mortgage is a partial illusion and very misunderstood.

Depending on the size of a household, the standard deduction can be substantial and a better choice.

The true net deduction is the *difference* between all itemized deductions and the standard deduction.

The standard deduction is the same across the country and in areas with low housing prices & property taxes in many cases the standard deduction is a far better option than itemizing.

For those with plenty of cash, assets, good credit & cash flow it can be wise to just eliminate their mortgage & simplify their lives.
This isn’t right for everyone.

It is foolish to accelerate a mortgage for those with 10-20-30% credit card debt, yet I’ve seen people do it.

With good credit, There are currently creative ways to borrow money for 1-2 years in the 1%-3% range.

1)You pay interest with after tax dollars.
2)You pay income tax on interest you receive.
3)NOT paying interest to someone else is a guaranteed *compounded* net return equal to your
interest rate.
There’s a distinct difference between the 3.

In some cases I’ve suggested that people take 401K loans to eliminate their mortgage and repay themselves AND reduce their exposure to the stock market.
It’s an effective strategy using pre-tax dollars.
*Not suggested for everyone*

[gzz]

“Depending on the size of a household, the standard deduction can be substantial and a better choice.”

Once you make about $70,000 or so, just your CA income tax alone is larger than the standard deduction. That’s almost everyone who is in the market for a house in CA.

[Coronita]

Sorry, I didn’t get back on this thread until now.

The rate of the 15 year was 2.5%
There’s now about $77k left on it and about 2 years 9 months left…

Regular monthly payment is $3650/month including impound.
Of that, $2534/month is P+I, with the rest being insurance+tax

Starting in Feb 1, interest portion is roughly $160/month, and falls about $5/month each month. Principal is $2374 and increases $5/month.

The amortization table is below.

A few notes:

1. I don’t foresee a cashflow issue or being “cash poor” if I were to pay the $77k off in my scenario.
While my net worth is currently split between roughly 50% stock, 45% real estate, and 5% cash, I can liquidate half of my stock holdings, as they are after tax.. And that’s part of what I have been doing…Selling stocks to pay down debt that doesn’t generate income (IE my primary)…Just incase 2016 is a bad year for the stock/bond market. The rentals in the real estate portion nets about $30k/year.

2. But when, I looked at the amortization table below, I saw that at most I only will pay an extra $2600 in total interest if I continue the mortgage payment schedule for the next 2 years/9 month. And to me, I thought that was a pretty cheap cost to have $77k left to invest. I guess for me, I was thinking in what, other than stocks/bonds which I’m trying to avoid.

That’s where I was thinking if I pay the mortgage off early, I’d be saying myself $2600, which came out to be about 1.18% on average per year, for the last 2 years/9 months, which is why I was thinking it wasn’t worth it.

But you folks are telling me that isn’t the correct way to look at it. 🙂 Which brings me to the original question: what is the correct way to look at it?

——
Month, Total payment, Principal, Interest, P+1, total interest, principal left

2/1/2016 $3,648.92 $2,373.83 $159.97 $2,533.80 $159.97 $74,410.23
3/1/2016 $3,648.92 $2,378.78 $155.02 $2,533.80 $314.99 $72,031.45

…

8/1/2018 $3,648.92 $2,526.77 $7.03 $2,533.80 $2,612.34 $848.60
9/1/2018 $1,965.49 $848.60 $1.77 $850.37 $2,614.11 $0.00

[Anonymous]

[quote=flu]Which brings me to the original question: what is the correct way to look at it?[/quote]

The correct way is to discount cash flows that occur in the future. But it’s really not worth the trouble in your situation.

I wouldn’t give a 2.5% mortgage loan another thought. Just make the required payments.

Like HLS said, the cost of your loan is your rate. That’s really all there is to it. You got a great deal, make it last as long as you can.

[Author]

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