mortgage

Mortgage escrow account not for investing

Don TaylorQuestionDear Dr. Don,
I have just discovered that my mortgage escrow account for a mortgage that I refinanced last year pays 2 percent interest. This is apparently mandated by New York state law. Is it possible for me to put extra money into my escrow account and earn interest on that extra money? Two percent is better than any certificate of deposit, or CD, pays right now.
-- Donald Depositor

AnswerDear Donald,
Lucky you. Most states allow the lender to keep the interest earnings on the account. A 2007 study done for the Mortgage Bankers Association listed 15 states where banks are required, with certain exceptions, to pay homeowners the interest on their mortgage escrow account balances. Those states are Alaska, California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont and Wisconsin.

You're not going to be able to use your mortgage escrow account as a high-yield savings account.

The Real Estate Settlement Procedures Act, or RESPA, limits the amount of cushion in an escrow account to a maximum of one-sixth of the total escrow charges for a year, and that's at the lender's discretion.

Where to put your savings? You can earn a 1.89 annual percentage yield in a 5-year CD with a five-star rated bank by shopping rates at Bankrate.com. For an investment up to the $5,000 annual purchase limit, you could buy a Series I savings bond. It has a minimum holding period of a year, a three-month interest penalty if you cash it in within five years of purchase, and the interest changes every six months with the change in the U.S. Consumer Price Index. Still, the yield is 3.06 percent for the next six months.

Find a balance between safety, convenience, liquidity and yield when choosing where to put money on deposit. For example, the savings bond isn't the right decision if you need liquidity.

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