Separating insurance and taxes from escrow

[Luke Grossmann]

Hello BP, I'm about to purchase my first rental property, and I'm considering not using an escrow account to pay my insurance and taxes. Below are the factors I'm aware of, but I welcome any and all thoughts on the matter.

Pros:
-Insurance provider offers 10% "paid in full" discount (not available after first year if paid through escrow)
-Easier to switch insurance provider down the road

Cons:
-Lender requires a one-time fee of 0.25% not to escrow ($280)
-Additional hassle of paying insurance and taxes separately

[Greg M.]

Your "pro" of easier to switch insurance companies is incorrect. It's harder to switch with escrow. It's an extra entity to inform and you have to hope that they don't pay the old insurance company by mistake. 

I've only used escrow when forced by the lender. It was never a good experience. Numerous problems - paid wrong insurance, double paid insurance, failed to pay insurance, incorrectly estimated tax increase by thousands of dollars, refused to acknowledge their errors, deducted wrong amount from our bank account for their calculation error and said it'd be a year before they could refund because they only did annual reviews, and when we finally refinanced away from them, they sent us the wrong escrow balance. Got a letter a year later saying the state had mandated they audit their accounts and they included a refund check for their incorrect calculations. I'd probably switch lenders before accepting escrow again.