Question

Can I pay my home insurance and property taxes on my own and not through escrow?

Answer

Maybe. First, let’s define the term “escrow.” In the context of mortgage accounts, “escrow” means 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 prior to closing the sale.

With a mortgage escrow account, you have to pay the loan 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. This ensures that your taxes and insurance premiums 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. (Learn more about how escrow accounts work.)

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 FHA loan, you must have an escrow account. The Federal Housing Administration (FHA), requires that lenders making FHA-insured loans establish escrow accounts for those loans.

Veterans Administration (VA) Loans

The Veterans Administration (VA) does not 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

Additionally, 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. (Learn more about the difference between a conventional, FHA, and VA loans.)

Waiving the Escrow Requirement

Generally, when you take out a conventional loan your mortgage lender will require an escrow account if you borrow more than 80% of the value of the property. This means that 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 own 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.

Canceling the Escrow Requirement

You might also be able to cancel an escrow account down the line. Every lender has different terms for canceling an escrow account.

In some cases, if you want to cancel the escrow account, the mortgage 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.

How to Cancel the Escrow Account

If you decide that you don't want to give your servicer control over your money for escrow items, call the servicer to find out if you qualify for a deletion of the account.

Issues to Consider

Before waiving or canceling your escrow account, you should consider whether or not you really want to get rid of it. Some borrowers may prefer to have one as a convenience. With an escrow account, the servicer (on behalf of the lender) 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.

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