When a loan is obtained to purchase a home, the lender needs assurance that real estate taxes and homeowners' insurance premiums will be made timely. An escrow account or impound account is often established so the loan servicer can make payments on behalf of the borrower. The lender stipulates whether a loan will require an escrow account. Typically, escrow is required if the loan-to-value ratio is more than 80 percent or a sub-standard credit rating exists. But, financial circumstances change. If you want to make payments for taxes and insurance directly (and possibly save a little money) removing the escrow requirement may be an option.
Review and familiarize yourself with the status of your mortgage loan. Calculate the current loan-to-value ratio on your loan by dividing the outstanding principal balance by the appraised value of the property. Determine whether any payments on your loan have been made past the due date. Obtain a credit report to assist in reviewing your payment history, if necessary. Review the annual escrow statement provided by your servicer to determine the amounts and dates payments were last made.
Contact your mortgage servicer to determine whether the escrow requirement can be removed and to make a formal request. The requirements of the servicer will vary. According to Select Portfolio Servicing Inc., its requirements include that the loan not be delinquent during the past year; taxes and insurance must be paid through the next 12 months; the loan-to-value ratio must be 80 percent or less; and any deficiency in an escrow account must be paid. Some servicers may charge a fee to make the change. If you determine that the change is not feasible at this time, ask the servicer what conditions must be met and create a plan to monitor your progress in reaching this goal.
Refinance the loan if the incentives to remove escrow are substantial and the transaction otherwise makes financial sense. Look for mortgage products that will allow you to assume responsibility for paying taxes and insurance. Note that some loan products may charge a fee for this feature.
Set up a plan to make timely payments if an escrow reserve will no longer be required. Review your annual requirements and save 1/12 of that amount each month plus a little extra in case the amount you must pay increases. Consider opening an interest-bearing account, such as money market account or CD, to increase your savings.
Consult with a financial planner about your circumstances, particularly if a refinance is under consideration.
- Consult with a financial planner about your circumstances, particularly if a refinance is under consideration.
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