When getting a new mortgage, you will need to discuss several different costs involved in purchasing and owning a home. Most lenders prefer that borrowers open an escrow account to pay taxes and insurance. Thus, the lender is in control of making sure property taxes and insurances are paid on-time. But, there are borrowers who prefer to pay their own taxes and insurance. Lenders call this an escrow waiver. Escrow waivers cost a little extra up-front but are available in certain scenarios.
If you have the option to waive escrow, you will need to understand what it is, as well as the pros and cons of having an escrow account.
What is Escrow?
Escrow refers to a third-party service that is part of every home purchase. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. An escrow account holds money that will be used to pay your annual property taxes and homeowner’s insurance premiums. The lender collects this money from you in installments as part of your monthly mortgage payment and retains the funds in an escrow account. From there, the lender manages making the property tax and insurance payments for you, as they are due.
When you purchase a home with a mortgage, you and your lender will need to decide if you will start an escrow account. In mortgage lending, escrow is a way of including mortgage insurance, property taxes, and any required insurances in a borrower’s monthly payment. Depending on your qualifications for your mortgage, you may be required to have an escrow account to ensure that certain expenses of owning your property are covered. This presents less of a risk for the lender. If an escrow account is not required, your lender can help you decide if it is a beneficial option for you.
How a Mortgage Escrow Account Works
The servicer collects escrow funds as part of your monthly mortgage payment, along with the principal and interest. Approximately one-twelfth of the estimated annual cost of taxes and insurance is paid into the account each month out of your monthly mortgage payment. The servicer might also collect a cushion—usually two months’ worth of escrow payments—to pay for unexpected increases in costs.
By making payments into an escrow account, you are essentially making an interest-free loan to the servicer; most escrow accounts do not pay interest on the money that is kept there. For this reason, some people prefer to hold on to their money and pay the tax and insurance bills themselves. Some states, though, do require interest to be paid on escrow accounts. To find out the law in your state, check with a local real estate attorney.
Benefits of an Escrow Account
- Mortgage Savings
Depending on your loan and lender, you may get a lower interest rate or lower closing costs by having an escrow account. It ensures for the lender that you will not be at risk of missing important payments related to owning your home. This gives them more confidence in financing your mortgage.
- Pay Monthly
By paying your property taxes and homeowners insurance in monthly increments, you essentially use an escrow account as a savings account toward these costs that would otherwise be due as large sums each year.
- Manage Changing Expenses
The cost of property taxes and homeowners insurance can fluctuate. If they go higher than initially estimated, the lender temporarily covers the expense and then adjusts your rate over the following months. If the expenses are lower than estimated, you receive a refund for the amount that you paid monthly but that was not needed.
Is an Escrow Waiver Allowed?
Again, lenders really prefer for borrowers to escrow their taxes and insurance. Obviously, if a borrower makes their monthly mortgage payment on-time, the lender is assured of two things. First, the home is always insured. Next, the property would not be foreclosed because of non-payment of property taxes. So, if lenders prefer escrows, how can a borrower get an escrow waiver?
Requirements to Waive Escrow
Fannie Mae advocates the establishment of an escrow account for the payment of taxes and insurance, particularly for borrowers with blemished credit histories or first-time homeowners. Unless required by law, lenders may waive escrow account requirements for an individual first mortgage, provided the standard escrow provision remains in the mortgage loan legal documents.
Escrow is required when purchasing a home with a mortgage in the following situations:
- If the principal balance of the mortgage is 80% or more than the original appraised value of the house. To waive escrow, make a down payment of at least 20% of the value of the house.
- If you are getting a loan that is insured by the Federal Housing Association (FHA). All FHA loans require escrow.
- If you have received a prior change to your mortgage payments, or had previously waived escrow, but then failed to make all payments on time.
- If you have been delinquent on any payments within the past 12 months or have been delinquent for 60 days or more within the past two years.
You can choose to waive escrow if none of these situations apply to you and it’s optional for your mortgage. You will need to provide the lender with proof of payment for property taxes and homeowners insurance. This may include paying for special required insurance, such as flood or earthquake coverage.
Escrow Waiver Fee
There is a lender charge for an escrow waiver. Basically, in exchange for the additional payment risk a lender takes, they are going to charge up-front for it. There are two escrow waiver fee options: pay a small percentage of the loan amount or pay a little more interest rate. Typically, lenders charge .25% of the loan amount as an escrow waiver fee. Occasionally, a lender could charge as low as .125% of the loan amount. Instead of paying an up-front fee, a borrower may choose to pay a 1/8% higher interest rate. Most of the time, it makes sense to pay the fee rather than take an additional 1/8% higher interest rate. Maybe the only time it makes sense to pay the higher rate would be if the borrower pays off the loan very quickly.
Why Choose Citrus Heritage Escrow?
Whether escrow is required for your mortgage or you have the option to waive it, your personal situation and financial needs will determine whether it will be best to pay your property taxes and homeowners insurance directly or through your lender.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200