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Am I required to have a Mortgage Escrow Payment Account?
Is an escrow payment account required if I have a mortgage? Effectively yes. This page describes why you need an escrow account, and what you can do to waive a mortgage escrow account.
Dramatic changes have recently occurred in the mortgage industry since the bailout of banks in the United States. The collapse was largely brought about by mortgages that were under default. This has resulted in a change in the handling of mortgages and the mortgage escrow payment accounts that help protect the mortgage from default. In the past it was easy to delete the escrow account from a conventional mortgage. Today it is difficult and expensive to remove an escrow account.
What is the definition of an escrow account?It is a depository account that the bank manages out of which taxes and home insurance are paid. Fees are collected on a monthly basis and the property insurance and taxes are paid out of those funds. The account is regulated by the Real Estate Settlement Procedures Act (RESPA) that defines how much the lender can charge you per month.
Why is a mortgage escrow account required?Its purpose is to protect the lender's capital. If your property is destroyed by a casualty, such as a fire, and you have no insurance, the lender may lose their collateral. Likewise, if you default on your property tax, your state can foreclose on your home, and the lender may lose its investment. It is therefore in the interest of the mortgage holder to require an escrow account.
How can I eliminate my escrow payments?
The reduction in risk of having an escrow account accompanying the mortgage makes it considered more "valuable" to lenders. When a mortgage is sold, an extra 25 basis points (or 0.25%) is commonly charged for mortgages with escrow payment accounts. Thus many mortgage companies today require the borrower (you) to pay a quarter percent of the outstanding loan amount to cancel a mortgage escrow account.
Following is what CitiMortgage, one of the leading mortgage servicing companies, requires of you to waive an escrow account. This is unfortunately typical with lenders in today's mortgage environment.
- Current on mortgage with a payment history of 12 months or more.
- No late payments of 30 days or more in the last 12 months.
- Loan to property value of 75% or less.
- The escrow account may not have a negative value.
- No tax or insurance bills due within 30 days of the request.
- You pay an "escrow deletion processing fee" of 0.25% of the loan balance.
One of the primary motivations to remove an escrow payment account is to allow you to invest your own money for greater income, rather than have it locked up in an escrow account. This is particularly true in some states, because RESPA leaves some regulations to the states, such as whether interest must be paid on your escrow account. However, since mortgage companies are currently charging outrageously high fees to drop the account, it is very difficult to recoup that cost with the investment of the money that would otherwise be locked up in an escrow account.
So it is possible to cancel an escrow account. But you must have substantial equity in the home and some cash to burn. The deletion processing fee is substantial - amounting to $500 on a $200,000 mortgage. Thus it is usually in the best interest of most homeowners to just bite the bullet and keep their escrow account. Instead of spending the $500 to have the escrow account waived, you may be better served by the cumulative effect of reducing the principal by $500.