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Plan for escrow creep

By HELEN HUNTLEY
Published September 17, 2006

Even fixed mortgages aren't really fixed for Florida homeowners. If you have an escrow account, you can count on higher mortgage payments as property taxes and insurance premiums climb higher.

The mortgage lender typically pays those big bills, then turns around and collects the money from you.

Robin Bravard said she and her husband, Alan, are steeling themselves for bad news in December. They expect to get notice of an escrow account shortage from their mortgage company because the insurance premium on their Spring Hill home will come due.

"What I've heard from other people is that insurance costs are doubling," said Bravard, 53, a Hernando County librarian. "My idea of the worst case is that we might end up owing $1,000 and our monthly payment will go up $100 a month."

Homeowners with escrow shortages have two options, said Monica Martines, spokesman for Third Federal Savings. "We give the customer the option of paying it up front or of adding it to the monthly cost, giving them a 12-month period to pay it back."

But an extended payback means twice as large an increase in the monthly payment, since it will be going up to try to prevent an escrow shortage the next year.

Bravard wants to avoid an extra-large increase so she is stashing money in a credit union account every chance she gets, hoping it will be enough to pay off the shortage.

She even asked if it would be a good idea to send in escrow payments in advance to head off the shortage. My answer: No.

Paying the bill before it's due would mean letting somebody else have the interest you could be earning for yourself. It would mean taking a risk that the payment might not be credited correctly and there's no reason to chance it.

Is it true that if you have a portfolio that generates 4 or 5 percent annually and it allows you to maintain your standard of living, that you will never run out of money?

If you spend less than you earn, you'll never run out of money. However, if you keep your spending level, you eventually won't be able to maintain your standard of living.

You've probably seen references to 4 percent being a safe withdrawal rate for retirees. This is based on the assumption that you have a portfolio 60 percent in stocks and 40 percent in bonds. You start out withdrawing 4 percent and increase the dollar amount of the withdrawal by the rate of inflation each year.

Back tests show that this plan has a very high probability of success, although there remains a small chance of running out of money, particularly if the market falls during the early years of retirement. If that happens, it would be advisable to reduce the withdrawal rate.

When do the new rules requiring a receipt for cash donations take effect? Our church gets a fair amount of cash special offerings.

Jan. 1 is the day new IRS rules start requiring you to substantiate charitable deductions. Donors may want to switch to checks or use offering envelopes for cash, allowing the church to record their gifts and give them a receipt.

I have been notified of an increase in my property tax assessment. How can anyone justify the amount of increases pending, when the housing marking has taken a major downturn? I cannot find a rational explanation.

Assessments are based on the past, on actual sales for comparable properties, not on speculation about the future. It will take a lot of properties selling at lower prices which has not happened to bring down assessments.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs.tampabay.com/money

[Last modified September 17, 2006, 07:57:17]