If you’re buying a home for the first time, you can either pay your property taxes and insurance through escrow or self-manage your payments. In this article, we’ll explore the pros and cons so you can make an informed decision.
We’re the Ben Lalez team, and after helping countless Chicago families buy homes over the last decade, we’ve found that the escrow decision often throws buyers off. We know it’s not as exciting as picking your dream kitchen finishes, but making the right choice about escrowing your taxes and insurance can be a significant decision.
Before we jump into the pros and cons, let’s talk about why this decision is especially important in Chicago.
Our property taxes are among the highest in the country, and they’re due twice a year, typically on March 1st and August 1st.
For example, if you’re buying a $400,000 home in Lincoln Park, your annual tax bill can easily hit $8,000. That’s a significant expense to come up with twice a year if you’re not financially prepared (click here to read Chicago Property Taxes Made Easy To Understand if you’d like to learn more about property taxes).
In addition, insurance costs in Chicago can vary widely depending on the neighborhood. For example, a condo in River North might have very different insurance requirements from a vintage bungalow in Portage Park, especially when you factor in things like flood zones and local crime rates.
Understanding Your Options
When you’re buying a home in Chicago, you typically have two choices:
1. Escrow Account
This is when your lender collects a portion of your estimated monthly taxes and insurance along with your mortgage payment. The average Chicago homeowner pays about $245/month for insurance through escrow, plus their portion of property taxes.
2. Self Managed
This is when you handle your tax and insurance payments directly, which means you have to deliberately save for the bi-annual tax bills and annual insurance premiums yourself.
There will be circumstances where you have no choice but to use escrow. For example, most lenders will require escrow if you use an FHA loan or put less than 20% down on a conventional loan.
What Are The Pros Of Escrowing?
Besides the convenience, there are some undeniable benefits to having your property taxes and insurance paid through escrow.
No Tax Surprises
Your property taxes in Chicago are reassessed every three years, which could lead to a surprise tax increase. When you escrow, your lender analyzes your tax bills annually and adjusts payments gradually based on those calculations.
Insurance Rate Increases
Due to Chicago’s brutal weather, insurance rates can increase after particularly bad winters or storms. When you use escrow, payments typically include a buffer for these increases so you don’t have to scramble at the last minute to cover higher premiums.
Closing Cost Management
Although escrow requires an initial deposit (approximate average is $1,650 in Chicago for two months of prepaid expenses), it prevents you from paying a full year of insurance ($2,945 on average) and prorated taxes upfront at closing. This can make a massive difference in managing your closing costs.
What Are The Cons Of Escrowing?
Here are some reasons why handling your own payments might be better suited for your situation:
Commission-Based Income
If you work in sales or another field with commission payments, you might prefer paying taxes and insurance in larger chunks when bonuses or commissions come in.
Investment Strategy
With Chicago’s high property taxes, some buyers prefer keeping money in high-interest accounts until payment is due. On an $8,000 annual tax bill, even a 4% return can mean a few hundred dollars in extra earnings.
Tax Appeal Management
Chicago’s property tax system can be a bit challenging to understand and follow. Some homeowners prefer handling their own payments because it keeps them more engaged with the assessment process in case they need to appeal their assessment.
Special Considerations For Different Properties
Here are some things to keep in mind, depending on the type of property you’re buying:
Condos
- Insurance costs are lower than houses since you’re typically covering interior contents
- HOA fees might already include some insurance coverage
- Property taxes can be more predictable in established building
Single-Family Homes
- Higher insurance costs due to full structure coverage
- Wider range of tax assessments, especially in rapidly changing neighborhoods
- Greater need for an emergency fund for repairs and maintenance
Multi-Unit Properties
- More complex insurance needs if you’re renting units
- Tax implications can be different for owner-occupied versus fully-tenanted buildings
- Lenders often require escrow regardless of your down payment size
Neighborhood Impact
Here are some things to keep in mind, depending on where you’re buying the property:
Developing Areas
- Property taxes may increase more quickly than in other areas of the city
- Insurance costs could decrease as neighborhoods improve
- Greater importance on monitoring your tax assessments
Established Neighborhoods
- More predictable tax trends
- Stable insurance rates
- Easier to budget for self-managed payments
Strategies For Managing Your Own Payments
If you decide to go the non-escrow route and handle all your own payments, here are some quick tips:
- Set up a dedicated high-yield savings account for taxes and insurance to earn some interest while you wait to pay
- Add 10% to your estimated payments just in case your property taxes increase
- Mark assessment years on your calendar to prepare for potential tax changes
- Keep detailed records for tax purposes and potential appeals
- Shop insurance rates annually for better deals
When Should You Seriously Consider Escrow?
Here are some reasons why using escrow might be the most sensible idea for you:
- You’re buying your first home and you’re still unfamiliar with the homeownership process
- You don’t have an existing emergency fund
- You’ve bought in a developing area where taxes might increase significantly
- You’re terrible at saving money in large sums
- Your lender offers rate discounts for escrowing
There’s really no one-size-fits-all solution, but the key is understanding all your options before you close. If you’re in the market to buy a home soon and need to understand more about closing costs and property taxes, give us a shout, and we’ll be glad to help!
