Reasons to Remove an Escrow Account

Having an escrow account is a convenient (and often required) pay-as-you-go way to prorate certain home ownership costs, such as property tax and homeowner's insurance, by paying a percentage of the annual total on a monthly basis. But there are numerous reasons for removing an escrow account so that homeowners can take care of these costs themselves, whether monthly, quarterly or at year-end. For example, if your income is seasonal, intermittent or commission-based, an escrow account may impose an inordinate financial burden during certain times of the year. And if you're an investor, removing your escrow account frees up monthly income that you'll be able to invest.

Escrow Accounts and Payment Obligations

When you have an escrow account, each monthly mortgage payment represents one-twelfth of your annual insurance and property tax obligations. Many lenders require an escrow cushion, usually the equivalent of two months’ worth of payments, in case costs escalate unexpectedly.

Some Loans Require Escrow Accounts

There’s generally no good reason, with some exceptions, that you can’t make these payments yourself and put the money for taxes and insurance aside in an interest-bearing account. Start by contacting your lender and finding out if they will consider escrow removal. However, if you have an FHA loan, escrow accounts are required. While VA loans don’t specifically require escrow accounts, for practical purposes it is unlikely the lender will remove an escrow.

That’s because the VA requires that property taxes and homeowner’s insurance are paid, and an escrow account is the easiest way to ensure this. If you took out a high-priced loan, those that are considered more expensive based on interest rates, points and various terms exceeding Consumer Financial Protection Bureau levels, you cannot have the escrow removed for the initial five years of your mortgage.

Meeting the Equity Threshold

If you don’t have at least 10 percent equity in your home, and some lenders may require 20 percent, it’s doubtful that a lender will agree to removing the escrow. That’s because homeowners with less equity in their houses are more likely to default on a mortgage. Once they have more “skin in the game,” a default represents a large financial loss for the homeowner. If you put a down payment of 20 percent or more on your home, your lender may not have required an escrow account.

Other Considerations

Equity is not the only consideration. If your escrow account is currently in the red, your lender may not approve a removal. Once your escrow account is again in positive territory, your lender may consider the request. Lenders may not consider removing escrow until you have held the mortgage for a certain period of time, perhaps a minimum of a year. If you ever made a late payment, that may determine whether the lender will consider removing the account. In some circumstances, a lender might allow the closing of an escrow account on your primary home but not on a vacation or investment property.

Making the Request

Call your lender to find out what is needed to remove the escrow account. Most lenders will require that the request is made in writing. Your tax and insurance payments must be up-to-date, and get confirmation from your town and the insurance company. Include the confirmations with the letter. Keep in mind that your lender will probably impose an escrow closing fee. Once the account is closed, you should expect a check for the amount outstanding.

Reasons to Keep the Escrow Account

While wanting to take care of the insurance and tax payments yourself is understandable, weigh the pros and cons before deciding to remove the escrow account. It will mean more paperwork on your part, as you must keep track of when insurance and tax payments are due rather than relying on your lender to take care of it. Even if the lender agrees to remove your escrow, it may still require you to provide proof of these payments, just adding another level of paperwork on your part.