Escrow Rules for Second Home Loans
Taking out a new mortgage loan to buy a vacation house or second home might require that you also open another escrow account. Lenders often require that their borrowers create an escrow account when they finance the purchase of a home with a mortgage loan. Under an escrow agreement, lenders use the money in these accounts to pay property taxes and homeowners insurance payments on the behalf of borrowers.
When you enter into an escrow agreement with your mortgage lender, you'll send extra dollars with every monthly mortgage payment. Your lender will deposit these dollars into an escrow account, using them to pay your property tax and homeowners insurance bills. This eases the bank’s risk that the property will be in default or uninsured. It also makes it easier for owners to save for these often large bills; homeowners save the needed funds automatically with each mortgage payment.
If you take out a second mortgage loan to pay for a vacation property or second home, you probably will have to open a second escrow account. That's because many mortgage lenders require borrowers to open such accounts before they'll loan the money. This is especially true with second homes. Lenders consider borrowers to be more likely to default on property taxes and insurance payments on vacation houses or second homes. If they run into financial difficulty, the thinking goes, owners will make an effort to keep up with the taxes and insurance on their primary residences, only paying the bills for their second home if they are sure they can cover their more important expenses. By making escrow part of owners' monthly second-home mortgage payment, lenders boost the odds that these bills will be paid.
To determine if you need to pay escrow on the mortgage loan you use to purchase a second home, study your escrow agreement. This agreement will state whether escrow is required or optional. It will also state when you can cancel your escrow payments. Some lenders won't allow you to cancel escrow for the life of your loan. Others will allow you to end your escrow agreement if you reach a certain level of equity in your second home, perhaps 20 percent. Still others will allow you to cancel at any time, but will charge you a fee for doing so.
Escrow on Your Own?
If you can cancel escrow on your second mortgage loan -- or if it isn't required -- you'll have to determine if paying your property taxes and insurance on your own is a smart financial move. Lenders don't have to pay you interest on the escrow accounts they create. Some homeowners would prefer to invest the dollars. They can then earn extra money while saving for escrow. You need to make sure, though, that you have the financial discipline to save for property taxes and insurance and to pay these bills on time. If you already run your own escrow account on the loan you used to finance your primary residence, you might be wary of creating your own escrow account for a second mortgage loan. Managing two escrow accounts -- and paying separate property tax and insurance bills on your own -- might be too much to handle.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.