Real Estate the Ramsey Way - How Does an Escrow Account Work?

Episode Date: February 3, 2025

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Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate home ownership with confidence. Courtney is in Dallas. Hi, Courtney. How are you? I'm doing good. How are you guys? Better than we deserve. What's up in your world?

Nothing much. I was wondering if you guys could tell me what the benefit is of not your. using an escrow account to pay for home insurance and taxes? Two things. One, you get to keep the money all year and earn interest on it instead of it's sitting in an account that's not interest-bearing until you pay your taxes and pay your insurance. So it accrues interest.

The second one is you don't screw up the accounting. And mortgage companies notoriously screw up the accounting on escrow accounts. And they get out of balance. And there's an escrow shortage. And then they raise your payment to make up the shortage. Or they just miscalculates. something and you've got somebody that's the lowest common denominator running the calculation too many times. And when I used to own a bunch of property with debt back in the day,

I would say as many as 40% of the accounts were screwed up. So I don't know if it's still that bad because I haven't had a mortgage in 30 plus years. But I suspect it is still a problem. The benefit of using the escrow account is it's on autopilot. You don't have to think about it. Right. Okay. And when most people don't manage their money well enough, they end up not having the money to pay their taxes or not having the money to pay their insurance, it sneaks up on them like Christmas. Yeah, and I know that some mortgage companies don't even give you the option sometimes. They require you to use an escrow account. Correct. A typical conforming mortgage, meaning a Fannie Mae, FHA, or VA will require it because they want to make sure that the house they have a lien against doesn't burn or it isn't taken for tax. taxes. Right. Okay. And so, yeah, you don't really have the choice. I personally, if I were you, I would just use the escrow account, but I would stay on them to make sure it's the proper amount.

Okay. How do you recommend staying on top of them? Well, you just want to make sure that the amount being taken out of your payment for, your payment is principal interest. If it has escrow, it's taxes and insurance, P-I-T-I. And you want to make sure the amount being held out for taxes and insurance each month is one-twelfth of the total of your taxes and insurance. It shouldn't be one, it shouldn't be less than that because you're going to come up short, and then they're going to have a shortage, because they're going to pay it either way. They don't want to get, they don't want you to be behind. And then, or there could be an overage.

Let's say they're taking out more than they need to. And so just make sure that the numbers are right and just look at it once a year and make sure they're not, you know, if your taxes and your insurance actually go up and they don't change the amount being withheld for it, you're going to get behind, right? Right. That's one of the ways you'd look at it. So that's the kind of thing you're doing. So I would use the escrow if I were in that situation.

I don't recommend, because I put everything on autopilot that I can. Just so you don't have to, yeah. So everyone. Yeah, even though it's not earning interest. It's not enough interest to matter. It's okay. Yeah. Yeah.

And more people are going to screw it up by not saving up the money than the mortgage company's I'm going to screw up the escrow account. Yeah, that's probably true. Totally. Yeah, and we have a part of our website that talks all about this and all real estate at ramsysolutions. com slash real estate. That's kind of our real estate home base because we just, it's one topic when it comes to your money that we get so many questions. So if you guys need more resources, there's free stuff.

Videos and articles and calls from the show. There's so much there to help you in this topic of your money when it comes to your home. Yeah, Ramsey Solutions.com slash real estate. honestly, it's the, the, the, the, the, that portion of our side is massive because we so get, we get so much a question on real estate and it's really, really a nice resource to help you. Yeah, for sure. So good stuff. It's good, good question, Courtney. Yes, excellent, excellent question. Let's go out to Minneapolis, Minnesota and talk to Laura. Hey, Laura, what's up? Hi. What's going on? Well, first of all, I want to say thank you. Um, last year I worked through the Ramsey plan and paid off my student loans. So I really appreciate all the work that you guys do. How much did you pay off?

$47,000. Wow. So do you not owe anybody anything anymore? Nothing. Nope. All right, can we do an impromptu? You do a debt-free scream right here on the radio? Um, sure. Can you scream your head off? Are you in a place where you can scream real loud? Um, I'm in my work parking lot. Oh, that's sure. Yeah, people already think you're crazy. It'd be great. That's true. All right, count it down. You paid off how much? What's the total? $47,000 $47,000. All right, we got Laura from Minneapolis, paid off

$47,000 doing impromptu to kind of weird, screaming in her parking lot, debt-free scream, let it rip. Three, two. Look at Georgie even coming through. All right, the best is you're watching on YouTube, the team zoomed in on the debt-free stage with the graphic and animation.

Just, only thing it's missing was you. Yes, all right, so what's up, Laura? How can we help? Okay, so actually, well, speaking of being debt, free. So I found some land recently and it's a really good deal and I don't necessarily have the funds for it. So normally I wouldn't even consider that makes it not a good deal. I know I know but hear me out hear me out. All right. So it's 20 acres for $29,000. Oh that sounds so awesome.

I know. That's what I'm saying. I might buy it. Is there bodies buried on it? Why is that cheap? It's so cheap. Well, I can't give the specifics. I don't want any else to find it. Wow. Yeah, just tell me where the GPS coordinates are. Like, I've driven past this land a million times. I checked it out last night.

I planned to check it out with the seller. I think the owner is just selling it directly. I'm planning to check it out tonight with him. And it's just a wooded area, a little bit of it. I don't plan to, like, build a house on it or anything. anytime soon. I would honestly, like, live on it in a tent

or, you know, just save quite a bit before, you know, building or anything. Then why are you buying this? Camping is a lot cheaper if you don't need 20 acres. Well, eventually, I would like to... Have you ever lived in the woods? I've camped plenty. Have you ever lived in the woods?

No, but I have considered it many times. I do. I do. I have a place where I rent. I do. And it's awesome. But it is not what you think. It's a lot.

Yeah. Yeah. So I guess I don't necessarily need to live there because I do rent for pretty cheap, so I could rent, you know, for a long time before building on there. But I guess the point of it was I don't plan to spend any more than the $29,000. I know, but you don't have $29,000. I don't have $29,000. Can I give you a great, like, Mama Camel wisdom?

This isn't, I'm going to say it in Arabic. I'm going to butcher it. but it's a gemer but irsh umma undi irsh and that's what this literally translates to the camel costs one penny and i don't have one penny is that not the coolest mama camel wisdom right there so here's what that means it's a the thing that's the best deal that you can't afford is a bad deal right so you're going to make payments on this thing that sits there that you don't even use all for the pleasure of knowing that you could camp on it yes but i actually i can't take out of loan on it because I don't have.

You're correct. Yeah. Because no banks think this is a good investment. And you know what the bank wants? Your business. When they're like, oh, we can't take your business. Then that's called a gatekeeper. They're trying to protect you from yourself.

So your only option would then be to do like an owner financing thing where they essentially loan you the money and you pay them back and you just create your own deal. Uh-huh. And I have a feeling you're actually going to try to do that when you go walk it. You probably don't know. So actually, I was wondering maybe if there was some kind of, of other options, like have people convinced owners to wait six to eight months while someone

does that Laura? They absolutely have. I mean, they've had this land forever. If you really convince them that Laura is the amazing, this is who I want this land to go to, and then you work your tail off and go save up 29 grand, maybe they'll call it good and say, all right, we're willing to sit on this land for 12 months, but you're agreeing to buy this as a future date. And I'm making this up, Dave is a real estate guy, so I'm making this up, but maybe there's a contingency contract that says I will, I intend to buy this in six months and here's my plan and even invoke the name Ramsey. I'm a Ramseyite. I don't have the cash. I'm saving up like mad. I just paid off all my student loans. I really want this. Will you hold it for six months? And here's my plan for how I'm

going to get $29,000. Maybe. Maybe. Maybe. So there's a small chance. So you're telling me there's a chance, right? Lloyd Christmas thought the same thing. but can I tell you something to give you some sort of optimism? Sure. I promise, a promise, I promise other land will pop up. Yeah. It just does. It does.

I think so. I think this is a good deal. I don't usually find land that is cheap or I haven't. But also my friend just told me last night she was like, do you need 20 acres? Or do you be fine with a lot less? I think I would be fine with a lot less. You would, but here's what you have in your head. You've worked really hard for the last few years.

you're tired and you deserve this. And it's kind of a carrot out there and it feels awesome. And I, dude, I totally get it. I've got land for sale all around me and I can't afford it. And it makes me B-A-N-A-N-A-S. As the great Gwen Stefani once saying, makes me crazy. But I can't afford it.

And so I can torture myself every day by being like, oh my gosh, if I could just, I can't afford it so I can go play with my kids. It's a better use of my time or go run around my dog. Right? Yeah. Just don't make yourself banana.

us. Uh-huh. You know what are you going to do with 20 acres for real? Like, what are you going to do? Are you a hunter? Well, sometimes. Okay.

Family hunt, so. Yeah. But I mean, that would be a lot more expensive than hunting on some free land. And what's the taxes on the 20 acres? I don't actually know. I'd have to ask the owner.

That's a great question. What's the easements? What is the ongoing maintenance costs? It's right on land. Or it's right on a road. Yeah. And what's the easement cost? And I don't even.

It's a pay part. of that. Yeah, it's just a lot. And I feel like I'm ruining your dream and you're actually one of the people I don't want to ruin your dream. I'm happy for you. I wish every American could own 20 acres. It's amazing. You just don't have $30,000. Yeah. But I could get there pretty soon, I think.

Okay. Come up with a compelling story. Get a guitar, maybe sing it to the guy. Maybe he'll hear that. Or you may take him out and he just gets really mad that you wasted his time. He's going to look at him like, you don't have any money. and be like, no, but I really want it.

In eight months, I really want it. You don't have any money? Or it's a Christmas miracle and he gifts it to her at no charge. Christmas miracles. That's the George, I know. I don't know. I'd always ask, why are you getting rid of it? It's a fair question to ask.

Why are you getting rid of it so cheap? Where are the bodies buried? What's going on, Buster? Yeah, there's like some secret. It just feels awfully cheap. I know it's, you know, Minnesota. But land ain't cheap these days. So, like, a grand an acre feels insane.

I don't want to get it, even though. I don't know. You'll never find it.