Is an escrow payment account required if I have a mortgage? Not necessarily, but you may not be able to avoid it. This page describes why you will likely be required to have an escrow account, and what you can do to get out of one.

An escrow account 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.

The purpose of an escrow account 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 taxes, the state can foreclose on your home, and the lender may lose its investment.

It is therefore in the best interest of the mortgage holder to make sure you always have insurance and that your property taxes are getting paid. The way they monitor these activities is through an escrow account.

Many mortgage loan holders do not want to hold mortgages that don’t have escrow accounts, due to the increased risk. In fact, the reduction in risk of having an escrow account accompanying a mortgage makes your loan much 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.

Despite the difficulty, you can get your escrow account removed if you qualify. The following is what CitiMortgage – one of the leading mortgage servicing companies – required from home owners that wanted to remove their escrow accounts a few years ago:

One of the primary motivations to remove an escrow payment account is to allow you to control and manage your own money rather than having your money locked up in your 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 high fees to drop escrow accounts, it is very difficult to recoup that cost with the investment of the money that would otherwise be locked up in an escrow account.

It is certainly possible to remove your escrow account, but the loan-to-value requirements and high cancellation fees make it a difficult decision.