An escrow account is set up by a lender to pay property costs. The lender uses money from the borrower to pay property taxes, insurance, flood insurance, and homeowner association dues. If the lender fails to make timely payments from escrow, they are liable for penalties.
Lenders can require an escrow account if you borrowed over 80 percent of the property value. This loan-to-value ratio means borrowers with a big down payment can avoid escrow. The Veterans Administration doesn’t require lenders to maintain escrow accounts on VA loans, but they ensure property taxes are paid and hazard insurance covers the property.
When you don’t pay into an escrow account, you must pay mortgage-related bills on time yearly. If you miss a payment, the lender may force an escrow account, pay the amount owed, and raise your mortgage payment. This could significantly increase your monthly payment.
Escrow accounts hold funds until conditions of a financial transaction are met. For home buyers and sellers, a real estate agent usually opens the escrow account with a bank.
Removing an Escrow Account
Lenders can delete an escrow account once you have enough home equity as you likely will pay taxes and insurance. But lenders can revoke waivers if you stop paying. Cancelling escrow after contingencies risks the buyer’s deposit. Once cancelled, the seller is notified immediately. The seller cannot back out based on an appraisal.
You must make a written request to your lender or loan servicer to remove an escrow account. Request that your lender send you the form or ask them where to obtain it online, such as the company’s website. The form may be known as an escrow waiver, cancellation, or removal request.
After five years, you can cancel the escrow account if the unpaid balance of the loan is less than 80% of the original value of the property and there are no delinquent payments. Contact your lender to start the escrow cancellation process if that is the best option for you.
Why Banks Want Escrow Accounts
Why do banks want you to escrow? Escrow accounts help protect borrowers and lenders from potentially late property tax and insurance payments. Monthly escrow payments mean a higher monthly mortgage payment than just principal and interest. In addition, the Consumer Financial Protection Bureau (CFPB) adds, escrow accounts can sometimes be required by law.
Each mortgage company will have its own set of rules for allowing you to remove escrow and handle tax and insurance payments yourself, but most share similar requirements. For example, the loan has to be in good standing, be under 80% loan-to-value ratio, and have been established for more than a year.
Escrow in Various Transactions
- Homebuying: An earnest money deposit should stay in an escrow account to protect both the buyer and seller.
- Monthly payments: A homeowner might make deposits in an escrow account with each monthly payment, helping to smooth out large annual expenses.
- Renters and landlords: Escrow accounts can help protect the interests of renters and settle disputes.
- Buying goods and services: Escrow is an option for almost any transaction where buyers and sellers want a “referee” to oversee payment.
Escrow accounts can be closed once you reach the eligibility point, such as attaining a certain amount of equity in the home or paying an escrow waiver fee. If you have a remaining balance in your escrow account after you pay off your mortgage, you will be eligible for an escrow refund of the remaining balance. Servicers should return the remaining balance of your escrow account within 20 days after you pay off your mortgage in full.