Let your escrow grow for
you, not your lender
Are you a do-it-yourselfer who wants to make
a few extra bucks? Or would extra money lying around burn a hole
in your pocket and leave you without enough cash to pay tax and
Depending on the answers to those and other
questions, you may be someone who can do without a mortgage escrow
account. Lenders require high-risk borrowers to establish escrow
accounts -- and suggest lower-risk customers do, too -- to ensure
they can pay real estate tax and homeowners' insurance bills when
they come due.
But many consumers have the option of foregoing
them and saving money for those bills on their own.
If you've got what it
Financially savvy shoppers can earn a few extra dollars in interest,
save money on taxes and avoid lender snafus by doing so. But forgetful
consumers who can't budget wisely should leave the work to their
"A lot of people just don't want to worry about
something like this," says Frances Graham, extension housing specialist
at Mississippi State University in Starkville, Miss. "They don't
want to have to worry about insurance being paid and when it's due
and there's something to be said for someone else handling it.
"But it depends upon the individual," she adds.
Responsible homeowners "have the opportunity to earn a little interest
if they put their money aside in a special account that they handle
and that they save regularly in."
Escrow accounts (also called "impound" or "reserve" accounts in
different parts of the country) offer customers the chance to save
money incrementally for big bills associated with homeownership.
Mortgage lenders maintain these accounts on behalf of borrowers,
who make payments into them each month along with their regular
principal and interest payments. Lenders keep the money from those
payments on deposit, then disburse it to local governments and insurance
companies when those entities send out their bills. That usually
happens twice a year for taxes and once annually for insurance,
though billing frequency varies.
Lenders want their borrowers to establish escrow
accounts for a couple of reasons. For one thing, they make money
off of them. Most states don't require lenders to pay borrowers
any interest on the money they hold on their behalf. Lenders can
therefore "play the float," or earn money off the cash borrowers
send in but that they don't have to pay to governments and insurance
companies for a couple of months. Secondary market buyers who purchase
mortgages from banks and other lenders pay more for loans with escrow
accounts attached to them, too. So by convincing borrowers to establish
them, they can pad their profits a bit.
Benefits for both parties
Escrow accounts help lenders avoid problems that can arise if taxes
and insurance go unpaid, too.
"The only lien that takes a higher priority
than a first mortgage lien is a tax lien. That supersedes a mortgage
note. Lenders prize dearly their primary mortgage liens and they're
not going to give them up or let anything happen without a fight,"
says Ilyce Glink, author of 100
Questions Every First-Time Home Buyer Should Ask. "Also,
they want to make sure the property is insured. If it's not insured
and there's a catastrophe, the lender can end up losing money."
Escrow accounts provide benefits for borrowers,
too. In essence, they work like automatic, forced savings plans.
By paying a smaller portion of their taxes and insurance every month,
homeowners can avoid having big bills come due at a time when cash
is short. Simplicity plays a role as well. Customers with escrow
accounts don't have to worry about tracking tax and insurance bills
because their lenders do it for them. That can come in handy for
people who just want to get a mortgage and forget about it.
"Knowing what I do and having had a number of
mortgages myself, I've had it both ways and I cannot think of an
advantage of not having an escrow account," says Rich Bennion, executive
vice president at HomeStreet Bank in Seattle. "It's so convenient.
It's kind of like having an automatic payment out of your checking
account -- you never have to worry about it."
Most customers agree, he adds. Out of roughly
40,000 mortgages serviced by the bank, 90 percent have escrow accounts
attached to them.
"People are much better off having the reserve
accounts just for ease and convenience."
But that convenience comes
with a price that many borrowers don't have to pay.
money is it, anyway?
By telling their lenders before closing that they don't
want to establish escrow accounts, they can take charge of their
That lets them earn discounts
-- such as those offered by tax authorities to people who pay early
-- that might not be available otherwise. It also prevents lender
servicing errors, such as missed tax payments, from cropping up.
"They may be late making the payments. The account
gets sold. Taxes don't get paid. The buyer gets a notice of default
of unpaid taxes and all hell breaks out," says Glink.
By socking away the money they would otherwise
have to send to their escrow accounts, consumers can pocket some
interest, too. Plus, they avoid the escrow account setup fees some
"Say you've got $10,000 in taxes because you've
got a large house," Glink says. "That's no small change in terms
of interest over the course of a year."
Not everyone can waive escrow accounts, though.
Most lenders prevent borrowers with small down payments from doing
so. The loan-to-value threshold below which they can be waived varies
by lender, but experts say it typically ranges from 80 percent to
Some lenders charge a fee for the "privilege,"
too. That covers two things -- the increased risk to the lender
that taxes and insurance won't be paid and the loss of income resulting
from the fact that non-escrow loans are worth less in the secondary
market. The charge can be a flat fee of, say, $250 to $500 or a
percentage of the loan amount. At HomeStreet, for instance, borrowers
can waive escrow below 80 percent LTV. But they typically have to
pay a quarter-point, or one-fourth of a percentage point of their
loan amounts, to do so.
If the fees for avoiding escrow would outweigh
the potential earnings from interest, borrowers should either find
another lender with cheaper fees or just accept the escrow account.
Borrowers without a lot of budgeting discipline should consider
letting someone else worry about payments, too.
But for prospective home buyers who want to
avoid servicing screw-ups and who have large enough tax and insurance
bills that saving money for them on their own is sufficiently profitable,
waiving escrow makes sense.