Looking for advice between 2 options for budgeting/tracking escrow.

Hi all,

I know that escrow is a controversial topic here, but I understand (and agree) tracking escrow is more work I don't necessarily need to do, but want to do. 

With that said, the reason I want to track escrow is so that I can take my income/expense report at the end of each year to fill in a spreadsheet I use (It's something my father-in-law provided us that he used to track their way to an earlier retirement essentially tracking all expenses down to how much you pay for insurance and other paycheck deductions so that you'd know your true expenses for early retirement). Plus, I just want to have it shown on the income/expense report for each year to file away for tracking. 

 

So the way I see it, I have 2 options. I've seen both come up in support articles/forums but since this is still my first month of starting my budget, I'm struggling to really know the pros and cons of each. 

1. Add my bank's escrow account as a budget account, split my mortgage payment into 2 transfer transactions; 1 to the mortgage and 1 to the escrow account. The con I think may come of this is that my income/expense report may not truly represent my true expenses since it would only track actual insurance/taxes paid and not the true cost of the mortgage, but maybe that's actually best assuming I always make sure to match the budgeted amount with the amount that exists in the escrow account?

2. Set the escrow account up as a tracking account, still treating each transaction as a transfer to the respected account. I am assuming this would then count the entire payment as an expense, not reporting the true cost of taxes/insurance but instead the total amount I'd be paying to escrow but at a higher rate since banks typically want to make sure to have some buffer as taxes and insurance inflates over time.

 

I guess my biggest basis for this post comes down to not really knowing how reporting is affected for budget accounts vs tracking accounts. I've watched some videos about the two types of accounts, but the reporting part is just not clicking for me. 

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  • Are you asking about self-escrowing?

    The bank does our escrow, and I track it as follows:

    Mortgage is a tracking account.  Escrow is another tracking account.

    A scheduled transaction is set to come out of my checking and go to the mortgage at the appropriate time.

    A scheduled transaction is set to move the year's escrow amount from the mortgage to the escrow at the same time.

    A scheduled transaction has an approximate interest amount coming out of the mortgage account.  I update that every month or two or three - whenever I reconcile that account.

    In the escrow account, the contributions are the other side of the scheduled transaction from the mortgage account.  There's another scheduled transaction for taxes each year (updated ahead of time when I get the info and feel like it), and a scheduled transaction for annual insurance. 

    I might verify all the numbers on the mortgage account quarterly, and the escrow yearly.  I do put a memo of how much $ went to principal... That's depressing.

    Since these are not budget accounts, there's no reporting other than the whole mortgage payment.  If I want data, I just go look at the account.  NBD.

    So far, it hasn't made sense to self-escrow because taxes/appraisal value just keep going up and up and up.  It's nice to let the bank take the hit instead of having to come up with the money all at once.  There was one year where there was a modest amount left, but all the other years have had a tax bill higher than the projected buffer of the account at that time. 

    If I want to commit to spending more time keeping up with things, I might want to keep our own escrow, earn the interest, and just WAM for a higher tax bill.  Not right now, though!

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  • Definitely want mortgage and escrow as tracking if you have them at all, because you can't spend your mortgage (or your escrow really). You'll split your checking outflow to the mortgage account and the escrow account. The mortgage account will also need to have outflows for interest charged each month. 

    Option 3 of course is to run your own escrow if your lender allows. In that case, you wouldn't have an account at all--you'd pay your own insurance and property taxes directly from checking like any other bill. 

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  • Justin said:
    I guess my biggest basis for this post comes down to not really knowing how reporting is affected for budget accounts vs tracking accounts. I've watched some videos about the two types of accounts, but the reporting part is just not clicking for me. 

    Of the native reports, only Net Worth takes your tracking accounts into... account. For your budgeted accounts, money sent to tracking accounts is treated as an expense.

    Of course, the easiest way to do this is to not have an escrow account in the first place and pay your property taxes and homeowners' insurance yourself. I then keep these funds in my budget. But if that's not an option, I'm sure there are others that track it like you want to and will come along shortly with advice.

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  • Tracking account for the Escrow. Split your mortgage payment, with part being a categorized transfer to the Escrow account. This money leaving the budget will show on the Expense report.

    Record outflows in the Escrow account for actual payments to Taxes, Insurance, and anything else paid out of escrow. These do not show on reports, but the account register obviously shows them.

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  • Only your first option gives you what you want but I wouldn't do it either.  I would classify the monthly mortgage escrow payment breakdown to taxes and insurance(categories) based on it's calculated monthly amount and then make an adjusting entry when the actual taxes and insurance are paid each year to reflect the actual amounts.  

    ETA: this is essentially what the bank does with the annual escrow analysis that causes your mortgage payment to change each year.

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