Many homeowners wonder whether it’s possible to remove escrow from their mortgage and take control of paying property taxes and insurance themselves. While escrow accounts are typically required by lenders to ensure these important payments are made on time, some borrowers may prefer handling them independently. There are pros and cons to this approach, and not everyone qualifies for escrow removal. Understanding how to remove escrow from a mortgage, the requirements involved, and what to expect afterward can help borrowers make more informed decisions about their financial responsibilities.
Understanding Escrow Accounts
What Is an Escrow Account?
An escrow account is a financial arrangement where your mortgage lender collects extra funds from you each month along with your loan payment to cover property taxes, homeowner’s insurance, and possibly other costs like flood insurance or mortgage insurance. These funds are held by the lender and disbursed on your behalf when the bills are due.
Why Lenders Require Escrow
Lenders use escrow accounts to protect their investment. By ensuring that taxes and insurance are paid on time, they reduce the risk of tax liens or lapses in coverage that could compromise the property’s value. For new borrowers or those with less equity, escrow is often mandatory.
Can You Remove Escrow from Your Mortgage?
When It’s Possible
Removing escrow from your mortgage is not automatic and depends on certain conditions. In general, lenders may allow you to waive the escrow requirement if you:
- Have at least 20% equity in the home
- Have a good payment history
- Are not behind on property taxes or insurance
- Have a conventional loan (not FHA or VA)
When It’s Not Allowed
Some types of loans always require escrow. For example:
- FHA loans require escrow for the life of the loan
- VA loans typically require escrow unless specifically waived under certain conditions
- Jumbo or high-risk loans may include escrow as a lender safeguard
If your mortgage falls under one of these categories, removing escrow may not be an option unless you refinance into a different loan type.
How to Request Escrow Removal
Step-by-Step Process
If you believe you qualify to remove your escrow account, here’s how to go about it:
- Review your mortgage agreement: Check the loan documents to see if escrow can be canceled and under what terms.
- Contact your mortgage servicer: Speak to your lender’s customer service to inquire about their escrow waiver policy.
- Submit a formal request: Some lenders require a written application or form to begin the escrow cancellation process.
- Provide proof of equity and payment history: The lender may require an appraisal or recent loan statements to verify eligibility.
- Wait for lender approval: If approved, the lender will issue instructions on how the removal will take effect and refund any remaining escrow balance.
Possible Fees
Some lenders charge a fee to remove escrow, often labeled as an escrow waiver fee. This is a one-time cost and should be factored into your decision. It can range from $100 to several hundred dollars depending on the lender’s policy.
Advantages of Removing Escrow
More Control Over Your Money
When you handle property tax and insurance payments directly, you can choose the payment schedule that works best for you. This can be useful for managing cash flow or finding better insurance rates on your own.
Potential Savings
In some cases, you might be able to shop for a cheaper insurance policy when you’re not limited by lender-approved providers. You may also avoid unexpected escrow shortages or excess payments.
Immediate Escrow Refund
Once escrow is removed, your lender may refund the unused portion of your escrow balance. This can offer a helpful cash boost that you can use for other purposes.
Risks of Canceling Escrow
Discipline Required
Without escrow, you’ll need to set aside money on your own and remember payment due dates. Missing a property tax or insurance payment could lead to serious consequences, including penalties, liens, or forced insurance placed by the lender at a higher cost.
No Monthly Cushion
Escrow accounts help spread out large annual expenses over 12 months. Without this cushion, you might face financial strain when large bills come due all at once.
Lender May Reimpose Escrow
If you fall behind on taxes or insurance after escrow has been removed, your lender may reinstate the account to protect its interests. This could happen without your consent and may include new escrow fees.
Alternatives to Full Escrow Removal
Partial Escrow Removal
Some lenders may allow partial escrow removal for example, continuing to escrow taxes but allowing you to pay insurance separately. This middle-ground option offers some flexibility while still maintaining protection for the lender.
Biweekly Payments
If your goal is to better manage monthly cash flow, switching to biweekly payments might help. This won’t remove escrow, but it can ease budget pressures without removing the protection that escrow provides.
Things to Consider Before Making a Decision
Financial Planning
Make sure you’re financially disciplined and able to save for large bills throughout the year. Setting up a dedicated savings account for taxes and insurance can help replace the structure escrow offers.
Impact on Mortgage Terms
Removing escrow may not impact your mortgage rate or repayment schedule, but it can change how your lender views your risk profile. Some lenders may require a slightly higher interest rate if you waive escrow at loan origination.
Property Tax Variability
Remember that property taxes can increase over time. Without escrow, you’re responsible for tracking changes and adjusting your savings accordingly. Failing to anticipate a tax hike can lead to budget shortfalls.
Removing escrow from a mortgage can offer more control, flexibility, and transparency in managing homeownership costs. However, it’s not the right choice for everyone. It requires financial discipline and attention to deadlines, as well as a clear understanding of the risks involved. Before proceeding, homeowners should carefully assess whether they meet the lender’s qualifications, weigh the benefits against the potential drawbacks, and develop a sound strategy to stay on top of tax and insurance obligations. Done correctly, escrow removal can be a smart financial move that puts more control back into the hands of the homeowner.