How Can I Avoid Escrows on My Mortgage?
February 8, 1999, Revised November 27, 2006, Reviewed July 21, 2009
"Is it wise to try and get the lender to waive the requirement that taxes and insurance premiums be placed in escrow? I would rather manage that money myself and earn the interest on it. How do I negotiate this point with a lender?"
Lenders generally require borrowers to include taxes and insurance premiums in their monthly mortgage payments, and placed in escrow until the payment date when the amount due is paid by the lender. The rationale for the requirement is that it prevents a weakening in the protection provided to the lender by the property. If the taxes are not paid, the tax authority could place a lien on the property that would have a higher priority than the lender's lien. Similarly, if the house burns down or is flooded away, the lender's protection goes with it if the insurance premiums had not been paid.
Before looking into how you can avoid escrow, you should consider whether or not you really want to. I was happy to escrow because it meant that the lender was assuming responsibility for what to me was a tedious chore. Control freaks will feel differently. So will borrowers who don't want to give lenders the use of their money for the period until payments are made.
A reason to avoid escrows that is even more compelling than the loss of interest is that occasionally lenders screw it up, as indicated in the following letter.
"For the second time in three years, our mortgage company… has erroneously deducted funds (almost $1300 the first time; over $700 this past time) from our escrow account allegedly to pay property taxes. Checked with our County Treasurer to discover that even though they sent our property tax bill to the lender our taxes were not paid. The county has added interest and penalty fees to our tax bill. Repeated phone calls, faxes, (including one to the CEO), certified mail, etc. have gotten us no where. Do you have any suggestions?"
This is an infuriating experience, and one of the reasons is that there is so little you can do about it. I advised the writer that the person to get to is not the CEO but the vice president in the servicing department in charge of tax escrows. You then provide that person with the evidence that the tax bill was sent and the money deducted from the escrow account but not paid, and insist that the bank pay for the lost interest and the tax penalty. If this doesn't work, follow the suggestions in Is There Recourse Against Bad Servicing?
Lenders should and some will waive escrow requirements if the borrower makes a down payment of 20% or more. The logic of this waiver is that if the borrower has that much equity in the house, it is safe for the lender to rely upon the borrower's self-interest to pay the taxes and insurance premiums. But of course, lenders profit from escrow accounts, and will attempt to collect a fee for granting a waiver, regardless of how much you put down. The fee is usually 1/4 to 3/8 of a point. which in the context of the transaction as a whole, is not much.
Don't get so preoccupied with avoiding escrows that you lose track of the fact that you are involved in a multi-dimensioned negotiation that involves interest rate, points, and other fees. A possible waiver of escrow is a small part of the deal. If the loan officer can induce you to pay a point above the market, for example, you probably won't have any difficulty getting him to waive the escrow requirement without a fee.
"Is it wise to try and get the lender to waive the requirement that taxes and insurance premiums be placed in escrow? I would rather manage that money myself and earn the interest on it. How do I negotiate this point with a lender?"
Rationale For Escrow Requirement
Lenders generally require borrowers to include taxes and insurance premiums in their monthly mortgage payments, and placed in escrow until the payment date when the amount due is paid by the lender. The rationale for the requirement is that it prevents a weakening in the protection provided to the lender by the property. If the taxes are not paid, the tax authority could place a lien on the property that would have a higher priority than the lender's lien. Similarly, if the house burns down or is flooded away, the lender's protection goes with it if the insurance premiums had not been paid.
Do You Want to Avoid Escrow?
Before looking into how you can avoid escrow, you should consider whether or not you really want to. I was happy to escrow because it meant that the lender was assuming responsibility for what to me was a tedious chore. Control freaks will feel differently. So will borrowers who don't want to give lenders the use of their money for the period until payments are made.
A reason to avoid escrows that is even more compelling than the loss of interest is that occasionally lenders screw it up, as indicated in the following letter.
"For the second time in three years, our mortgage company… has erroneously deducted funds (almost $1300 the first time; over $700 this past time) from our escrow account allegedly to pay property taxes. Checked with our County Treasurer to discover that even though they sent our property tax bill to the lender our taxes were not paid. The county has added interest and penalty fees to our tax bill. Repeated phone calls, faxes, (including one to the CEO), certified mail, etc. have gotten us no where. Do you have any suggestions?"
This is an infuriating experience, and one of the reasons is that there is so little you can do about it. I advised the writer that the person to get to is not the CEO but the vice president in the servicing department in charge of tax escrows. You then provide that person with the evidence that the tax bill was sent and the money deducted from the escrow account but not paid, and insist that the bank pay for the lost interest and the tax penalty. If this doesn't work, follow the suggestions in Is There Recourse Against Bad Servicing?
Avoiding Escrow
Lenders should and some will waive escrow requirements if the borrower makes a down payment of 20% or more. The logic of this waiver is that if the borrower has that much equity in the house, it is safe for the lender to rely upon the borrower's self-interest to pay the taxes and insurance premiums. But of course, lenders profit from escrow accounts, and will attempt to collect a fee for granting a waiver, regardless of how much you put down. The fee is usually 1/4 to 3/8 of a point. which in the context of the transaction as a whole, is not much.
Don't get so preoccupied with avoiding escrows that you lose track of the fact that you are involved in a multi-dimensioned negotiation that involves interest rate, points, and other fees. A possible waiver of escrow is a small part of the deal. If the loan officer can induce you to pay a point above the market, for example, you probably won't have any difficulty getting him to waive the escrow requirement without a fee.