Mortgage lenders require escrow accounts for the payment of real estate taxes and homeowner's insurance on loans with minimal equity. First-time buyers, borrowers of government-backed loans and borrowers who have failed to remit payments to their tax authority, or have allowed their insurance to lapse, may have to establish the account. In certain cases, you can remove escrow by paying the lender a little extra at closing or by maintaining a good payment record with the lender.
Removing an escrow account makes sense for responsible borrowers. Even inexperienced homeowners can have good budgeting skills, which minimizes the need for an escrow account. From a savvy borrower's standpoint, you are better off handling the payments on your own and earning interest on the money as it accumulates in a personal account. From a lender's standpoint, a borrower who hasn't saved up the standard 20 percent down payment or has never owned a home, has a higher chance of default and skipping tax and insurance payments. In general, lenders don't remove escrow accounts solely based on your ability to save and budget; you must meet the lender's guidelines for waiving escrow.
Before making the loan, some conventional lenders waive the escrow requirement, despite a low down payment. Lenders on government-insured mortgages, such as a Federal Housing Administration loan, do not waive the escrow requirement. In most states, lenders waive escrow for a fee of one-fourth of a percent to three-eighths of a percent, according to Bankrate.com. You can generally cover the fee out of pocket at closing or accept a higher interest rate on the loan. In certain states, such as New York and Illinois, where escrow waiver fees are prohibited, lenders do not allow you to waive escrow.
Your mortgage payment can fluctuate as a result of your escrow account. For example, the tax authority may increase your taxes based on a new assessment of your home's value. Your lender may absorb the cost of the fluctuation, initially; however, it passes the increase on to you by requiring a higher escrow payment over the following 12-month period. You may also want to remove your escrow account if your income fluctuates monthly. Commission-based earners may have difficulty covering the total monthly payment, including escrow, during months when income is low. Paying the tax bill once or twice a year and insurance annually may be easier on a variable monthly income.
You may be able to cancel your escrow account after you have built up enough equity in your home and proven that you can make your mortgage payments on time for at least one year, according to the Consumer Financial Protection Bureau. The requirements for removing escrow vary by lender and you must contact them directly to determine whether your qualify. "Once an escrow requirement is in place, it can be difficult to persuade a lender to cancel it," Realtor.com says.
- Realtor.com: Understanding Escrow Accounts
- Consumer Finance: What is An Escrow Impound Account?
- Bankrate.com: Know Escrow Rules Before Waiving Them
- Fannie Mae: Managing Escrow Accounts
- 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.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.