How to Get Rid of Your Mortgage Escrow Account

Mortgage lenders often require borrowers to have an escrow account. With this kind of account, you pay a few hundred dollars extra every month on top of your monthly mortgage payment of principal and interest. The servicer keeps this extra money in the escrow account until your property tax and homeowners' insurance bills are due. The servicer then uses the money to pay the bills on your behalf.

Some borrowers like the ease of having an escrow account; by paying a little bit each month, they can avoid worrying about having to pay large amounts when the tax or insurance bill comes due. But if you prefer to pay these bills on your own, you might be eligible to cancel the account—if you meet certain criteria and depending on the type of loan you have.

What's an Escrow Account?

First, let's clearly define "escrow" in the context of mortgage accounts. This kind of escrow is something different than when you purchased your home. That kind of escrow is where a neutral third party holds funds, such as earnest money, or documents before closing the sale.

With a mortgage escrow account, you have to pay the servicer a certain amount each month to cover property taxes, homeowners' insurance, and (sometimes) private mortgage insurance and homeowners' association dues. These are collectively called “escrow items.” The servicer then pays for those items on your behalf as the bills come due. Having an escrow account ensures that your taxes, insurance premiums, and the like are paid on time and in full.

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're essentially making an interest-free loan to the servicer because most escrow accounts don't pay interest on the money that's 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, have to pay interest on escrow accounts. To find out the law in your state, check with a local real estate attorney.)

Your Loan Might Require an Escrow Account

Many lending institutions require escrow accounts for certain types of loans.

• Federal Housing Administration (FHA) loans. If you have a Federal Housing Administration (FHA) loan, you must have an escrow account. The FHA requires that lenders making FHA-insured loans establish escrow accounts for those loans.
• Veterans Administration (VA) loans. The Veterans Administration (VA) doesn't require lenders to maintain escrow accounts on VA-guaranteed home mortgages. However, the VA does require that lenders ensure that the property is covered by sufficient hazard insurance at all times and that property taxes are paid. So, most lenders use escrow accounts to comply with this requirement.
• High-cost home loans. Some lenders must collect monthly escrow payments from you for at least the first five years you have the mortgage if you have a “higher-priced” mortgage loan. (“Higher-priced” mortgage loans are loans that have a rate based on interest, points, and other loan terms that is higher than levels established by the Consumer Financial Protection Bureau.)
• Conventional loans. With conventional mortgage loans, the lender decides whether or not to require an escrow account. Most conventional loan contracts, including the Fannie Mae and Freddie Mac uniform mortgage and deed of trust forms, contain an escrow clause. This clause requires an escrow account unless the lender waives this obligation in writing. Generally, when you take out a conventional loan your lender will require an escrow account if you borrow more than 80% of the value of the property. So, if you make a down payment of 20% or more, your lender probably will likely waive the escrow requirement if you request it, though the lender might require you to pay an escrow waiver fee. The reasoning behind this is that if you have sufficient equity in the house, it is in your self-interest to pay the taxes and insurance premiums. But if you don’t pay the taxes and insurance, the lender can revoke its waiver. (Learn more about the difference between a conventional, FHA, and VA loans.)

How to Remove an Existing Escrow Account

In some cases, you might be able to cancel an existing escrow account—though every lender has different terms for removing one. In some cases, the loan has to be at least one year old with no late payments. Another requirement might be that no taxes or insurance payments are due within the next 30 days.

If you decide that you want to get rid of your escrow account, call your loan servicer to find out if you qualify for a deletion of the account.

Issues to Consider Before Canceling an Escrow Account

Before waiving or canceling your escrow account, you should consider whether or not you really want to get rid of it. Some borrowers prefer to have one as a convenience. With an escrow account, the servicer assumes responsibility for making sure taxes and insurance are paid. That’s fewer bills you have to deal with. (Learn what happens if you don't pay property taxes on your home.)

Even if the lender waives or cancels the escrow requirement, it might require you to provide evidence that you have made the payments for taxes and insurance, which can be a hassle. And, if you don’t keep up with the taxes and insurance premiums, the servicer can pay the taxes for you or buy insurance coverage and you'll then have to repay those amounts—otherwise, the lender might foreclose.

If you're facing a potential foreclosure, consider contacting an attorney to find out about your options.