If you trust yourself to save up the money you need to pay your homeowners insurance and property tax bills each year, cancelling your escrow arrangement with your mortgage lender might make sense. Rather than sending extra money to your lender throughout the year to fund an escrow account, you can take that money and save it in an interest-bearing account, something that will allow you to earn at least some money on those dollars. You will, though, have to check with your mortgage lender. Not all allow you to cancel your escrow account.
What Escrow Is
In an escrow arrangement, you pay an extra amount with each of your monthly mortgage bills to fund an escrow account. Your lender manages this account. When your bills for property tax and homeowners insurance come due, your lender dips into this account to pay these bills for you. The benefit of this? You don't have to worry about saving up the money during the year for these large bills. You also don't have to worry about accidentally missing a payment.
Why Cancel Escrow?
Some borrowers prefer paying their taxes and insurance bills on their own. This gives them more freedom over their money, and gives them the chance to earn interest on it. Mortgage lenders are not required to pay interest on the money they hold for escrow. If you are a smart investor, you might be able to take this same money and stow it during the year in an interest-bearing account. This will earn you extra money that you won't get by sending these same dollars to your mortgage lender. Of course, you will have to make sure to actually save the money you need to pay your bills. And you'll have to remember to pay these bills on time.
To cancel escrow, first study the escrow agreement you signed when you took out your mortgage loan. If you can't find this paperwork, call your lender and ask for a copy. This agreement will tell you whether you can cancel your escrow agreement. Some lenders require escrow. If this is the case, you won't be able to simply request a cancellation. Other lenders let you cancel your escrow account at any time. Some others might allow you to cancel your account after you've reached a certain amount of equity in your home. You might also have to pay a fee to cancel escrow; this will vary by lender.
Your lender might require you to fill out and sign a form stating that you want to cancel your escrow account. Once you do this and return the form, the lender will close your account and refund any money in it. You should also call your county and insurance company to tell them that you will now be paying your property tax and insurance bills, not your mortgage lender.
If your lender doesn't allow you to cancel escrow, you might still be able to close this account by refinancing your mortgage loan. This cancels one mortgage loan and provides you with another one, hopefully at a lower interest rate. Refinancing, though, can be time-consuming and expensive. And you can usually refinance only if you have at least 20 percent equity in your home. You'll have to decide whether such a move makes sense.
- U.S. Department of Housing and Urban Development: RESPA FAQs About Escrow
- Bankrate: Pros and Cons: Saving in an Escrow Account
- Wells Fargo: Understand Your Escrow Account
- Cornell Law School. "Escrow." Accessed March 15, 2020.
- Los Angeles County Consumer and Business Affairs. "Escrow." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "What Is an Escrow or Impound Account?" Accessed March 15, 2020.
- The People's Law Library of Maryland. "Rent Escrow: When the Landlord Fails to Make Repairs." Accessed March 15, 2020.
- California Department of Business Oversight. "Online Escrow Fraud Questions and Answers." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "Mortgages Key Terms." Accessed March 15, 2020.
- FindLaw. "Connecticut Security Deposit Laws." Accessed March 15, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.