Waiving Escrows

When you buy or refinance a home with a mortgage, most lenders will encourage you to escrow your tax bill and insurance premium with the mortgage payment. What’s important to know is that some escrow accounts are not required, while others are.

Government loans such as FHA and USDA programs require escrow accounts. On conventional loans, however, they’re optional.

When I tell people that conventional mortgage loans don’t require an escrow account, they often look puzzled. Why is that?

First, because lenders can require that your payments be escrowed, which is often what occurs when you don’t have at least a 20% down payment.

Second, lenders can create an incentive for you to escrow your payment — or create a penalty not to escrow your payment. This allows lenders to cater to borrowers who demand they not escrow their payments, but an interest-rate adjustment is typically added.

There are several reasons why mortgage lenders want you to escrow your payments, but the main one is to protect their investment by ensuring taxes and insurance are budgeted for. This is neither good, nor bad, but think of it like a forced budget. It alleviates the concern of getting hit with a large tax bill and/or a large insurance bill every year. Just know that escrows can be helpful, and many people prefer them.

On the flip side, the benefit to waiving escrows for a mortgage is that your cash needed to close will decrease. The reason is because whenever you’re paying escrows, the lender is required to collect all the months of taxes and insurance that will later be due. So you’re paying those costs at closing in the form of “closing costs” instead of later when the bills come due.

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