The escrow portion of your mortgage payment is the amount covering taxes and insurance that are paid through your mortgage company. Your mortgage company takes the total amount owed over the year and spreads your payments over that period through your mortgage payments. Removing escrow from your mortgage payment gives you greater control over your finances and may improve your cash flow,  though it may not be for everyone. This article will walk you through the steps to remove escrow and manage property taxes and insurance payments independently, as well as the questions to answer to determine if this strategy is right for you.

Why Would You Want to Remove Escrow?

Removing escrow can significantly increase your discretionary income. While having your lender take out the necessary payments may be a simple way to make sure taxes and insurance are paid, the “extra” cash flow could be used to create greater efficiency through The Shred Method™. Instead of having your lender hold funds for taxes and insurance, you gain immediate access to that money. This extra cash flow can be used strategically to:

Accelerate Mortgage Payoff: By applying these funds directly to your mortgage principal, you can reduce the principal balance faster, potentially shaving years off your mortgage and saving thousands in interest.

Increase Financial Flexibility: Without escrow, you can allocate your money where it’s needed most each month, providing more flexibility in managing your finances.

Removing escrow not only empowers you with greater financial control but also enhances your ability to pay off your mortgage and other debts quicker, giving you a direct path to financial freedom. (As an example, if you have a car loan of 12,000 with a payment of $500 per month, by removing escrows, you may be able to pay the car off entirely using The Shred Method™, saving you the $500 per month payment in short order.) 

**You’ll obviously still need to pay taxes and insurance on your home, however we’ll do that through the Shred Account, which we cover in the course.**

1. Understand the Implications

Before proceeding, it's essential to understand the implications of removing escrow:

Responsibility: You will be responsible for paying property taxes and insurance premiums directly. These are usually paid every six months for taxes, and typically just once a year for your insurance premium.

Budgeting: Ensure you have a system to budget and save for these expenses. What you don’t want to do is remove escrows from your payment and then wrongly believe you’ve got an extra grand to play with every month. We’re going to use that money strategically!

Potential Costs: Check if there are any fees or penalties for removing escrow. Typically, it can be done with a phone call to your mortgage servicing company. On rare occasions, your servicer may have you fill out additional paperwork to have the escrow removed. 

2. Review Your Mortgage Agreement

Check your mortgage agreement or contact your lender to understand:

Escrow Terms: Review the terms related to escrow in your mortgage documents.

Eligibility: Confirm if you're eligible to remove escrow (usually requires a certain amount of equity or a history of timely payments).

3. Contact Your Mortgage Lender

To initiate the process:

Request Escrow Removal: Contact your mortgage company and inform them that you would like to stop escrow.

Provide Documentation: Be prepared to provide proof of insurance and tax payment history.

4. Communicate with Your Insurance Company

Once escrow is removed:

Stay Informed: Contact your insurance company to stay on top of what is owed and when it's due. Typically, insurance payments are due once or twice a year.

Set Reminders: Schedule reminders to ensure timely payments to avoid any lapse in coverage.

5. Visit Your Local Tax Office or the Online Portal

To manage your property taxes:

Check Payment Schedules: Visit your local tax office to verify what you owe and when it’s due.

Stay Organized: Local tax offices are generally proactive in notifying you of taxes owed, but it's wise to keep track of this yourself to avoid surprises.

6. Prepare for Escrow Removal

Your lender may require:

Proof of Insurance: Provide current proof of homeowners insurance.

Tax Payment History: Show evidence of timely property tax payments.

Financial Stability: Demonstrate your ability to manage taxes and insurance payments independently.

7. Review and Sign New Mortgage Terms

If your lender approves your request:

New Payment Schedule: Review the updated payment schedule and terms.

Updated Mortgage Agreement: Sign any necessary documents or agreements.

8. Manage Your Taxes and Insurance

With escrow removed:

Set Up a Budget: With the extra money you’ll have at the end or beginning of the month, make sure you’re staying within your budgeted spending. Again, this “surplus” of funds is meant to be used strategically within The Shred Method™. If you were spending a certain amount each month before removing escrows, keep that number roughly the same. 

Use Your HELOC: The Home Equity Line of Credit (HELOC) is the vehicle we use to pay your taxes and insurance when they’re due. This approach maximizes the efficiency of your cash flow while allowing you some flexibility in paying bills that are due only once or twice a year. 

Stay Organized: Keep track of payment due dates and amounts to avoid missed payments. We recommend plugging in the amounts due for taxes and insurance to the ‘Edit Financial’ tab in the Shred software. This will remind you when the payment is coming due and make sure there’s room enough on the HELOC to cover the expense. 

9. Monitor Your Financial Situation

Continuously monitor your finances:

Review Statements: Regularly review your bank and insurance statements.

Adjust Budget: Adjust your budget as needed based on changes in insurance premiums or property taxes.

10. Follow Up with Your Lender

Ensure that escrow has been successfully removed and verify:

Payment Adjustments: Check that your mortgage payment reflects the removal of escrow.

Updated Information: Confirm that your lender has updated your account records.

Ready to Crush Your Debt?

If you're interested in learning how The Shred Method™ can help you blast away your mortgage and other debts even faster, we invite you to book a Discovery Call with one of our experts. We'll walk you through the process and show you how to achieve financial freedom quicker than you ever imagined.

Book a Discovery Call

Conclusion

Removing escrow from your mortgage payment is just one option when using The Shred Method™. If you’re wondering if this strategy is right for you, consider the following questions: 

1. Am I disciplined enough with my budget to control my spending if there is significantly more than I’m used to in my account?
2. Will I be diligent and disciplined in following the software prompts to make additional lump sum payments when directed?
3. Will my mortgage servicer even allow the escrow to be removed based on the equity I currently have in my home?
4. Can I stomach the thought of not having money “pulled out” every month to cover these two potentially large expenses throughout the year?

This particular strategy doesn’t always suit everyone, but the added efficiency of having those lump sums to pay down the primary mortgage loan will likely save you tens of thousands of dollars in interest over the long haul.