Use Emergency Fund?

[Finally_Frugal]

Hey there,

I have a quick question: I just received a statement from my mortgage company indicating that my escrow account will fall short next year---and I can either pay the $363 now (which will actually lower my mortgage payment over the next 12 months), or spread it over the year, adding a little more than $10 to my mortgage payment each month.

Finances are pretty tight right now, and basically the only way I could come up with $363 would be to use my EF (currently at $1,000). Drawback? I would have to stop paying extra to my credit cards for two months to build my EF back up.

My mortgage is at around 6.5% and my credit debt is 4.99%. Is this a no-brainer? Isn't this what the EF is for, anyway? Somehow, I picture a tree through the roof as more of an 'emergency', but I guess this qualifies. . . .

What do you think?
Thanks!

[Basenjimom]

How long will it take you to biuld the $363 back up in your E fund? If it were me, I think I would spread it out with the extra $10 per month.....then you can keep moving forward with your debt repayment, and still have your Efund intact for any emergencoes that DO NOT give you the opportunity to spread the payments out like that.

[Finally_Frugal]

It would probably take me at least two months (probably not more, if I'm careful) to rebuild my EF. It DOES make me nervous to take that much out of my EF when things are so tight, and I can definitely save $10 a month here and there to cover the extra to my mortgage. . . .

thanks for your comment!

[72Tiger]

I could be wrong, and I have never really thought it through, but escrow payments aren't really subject to the mortgage interest are they? They are essentially just prepayments into an account held by your mortgage company to use in order to pay home insurance and tax bills. If that is truly the case, then I would just opt to pay the $10 extra per month and preserve your $1,000 for a 'real' emergency.

[Julie Rains]

Originally Posted by 72Tiger

I could be wrong, and I have never really thought it through, but escrow payments aren't really subject to the mortgage interest are they?

You are right - they are just add-ons to make sure you pay your property taxes, home insurance, etc so the bank doesn't get stuck with a burned down house (and no insurance) for example. I'd go with the $10/month also.

[Finally_Frugal]

Wow, thanks so much everyone! I never considered the fact that I won't be accruing additional interest by spreading the payment out over 12 months. My EF will remain at $1,000 (whew!) and I get the satisfaction of continuing to throw a hundred or so extra at my credit debt each month. . . .

[jdp]

Glad you got some good help. I couldn't figure out how $10/mo for a year was going to = $363. Or if you can build up $363 in 2 mos???? And if your escrow is short that amount how is paying it all now going to lower your payment? Nevermind.

If you'd like advice from someone as clueless as myself - when I feel things are *that* tight - I prepay any and everything I can to lower monthly expenses. So in this case I'd use the EF to pay the $363, go for the lower monthly payments for this year while I worked on tweaking my budget to not have things so tight,esp if you can makeup the short fall in 2 mos.

I applied the same principle when I was close to paying some things off - I paid everything I could ahead - instead of paying $5 extra a month to have car insurance monthly installments, I took my savings and paid for the whole year ahead... anything that had a fee for using it. Then again, depending on what your total cc debt is at 4.99% and your income, I'd have probably plunked the $1k on that instead of an EF (as long as your cc isn't/wasn't maxed).

[Blueporch]

The way I see it, Emergency Funds are for money that you can't get any other way. You do have a way to get this money (paying the $10 a month), and keep your EF intact. So it's a no-brainer -- don't use the EF. (I'm also unclear on how $10 a month = $363!)

[khorrell]

Read over your escrow analysis carefully...that's the document that shows what the mortgage company expected you to pay in taxes and insurance last year, what you actually ended up paying last year, and what they expect you to pay next year. This is how they figure out how much to escrow out of your account, and whether or not you are over or under. Look over it just to make sure that the numbers are all right...no sense worrying if its just a bank error.

That said, there is probably not an error. For most of us, our taxes and insurance inch up a little bit (or a lot) every year. Since the mortgage company escrows money in advance for these payments based upon what it knows about last year's bills, it is fairly inevitable that shortages will occur.

From what you have said, it sounds like you would feel better about keeping your emergency money in place. That's the most important part - which choice helps you to sleep at night?

Secondly, you are presumably earning at least some interest on that emergency money, and most mortgage escrow accounts don't pay interest. Unless you have some completely wacky mortgage details, there probably isn't a penalty for your escrow balance falling below their reserve level, or even below zero for that matter. I would just double check to make sure that there isn't a fee for having negative or low escrow account balance. As long as there isn't, then from a strictly dollars and cents standpoint, you would benefit from paying the shortage over time rather than upfront.

I hope this helps, and ask if you have any questions. I used to be a mortgage person in a previous life and I understand this stuff pretty well.

Good luck!!

[Ginger]

Total no brainer. Spread it over the 12 months and pay the extra $10. When you have an emergency you'll that money and then all of a sudden, it makes no sense to have pulled $363 to save $10 a month.