The conventional home buying process is a simple procedure — you make an offer to the seller, find a lending firm to finance the deal, sign the purchase document at closing, and agree on a payment plan to pay back your loan servicer. For the non-inquisitive, that’s all it takes to buy a house. But for the curious (like me), we know that owning a real estate property doesn’t end there — there are annual fees (property tax and insurance, HOA fees, and so on) you need to pay.
And based on lien seniority, these fees (property tax and insurance) are as important as the monthly mortgage fee. Therefore, delinquencies can lead to tax or insurance foreclosure, which could be bad for both parties (the lender and the buyer). So, to prevent foreclosure because of the homeowner’s default on payment, the loan servicers decide to monitor these additional fees. That’s done by them (lender) collecting the fees with the monthly mortgage and saving them in an escrow account until the payment are due.
Although that’s beneficial for both lender and property owner, having an escrow account with the lender isn’t compulsory — you can decide not to use an escrow account and apply for a waiver (if you qualify for one). What does it mean to waive escrow, how does it work? And what are the pros and cons of escrow waivers? If you want to know what that means, read on!
What’s a Mortgage Escrow?
A mortgage escrow is an account held by a neutral third party on behalf of the lender and the homebuyer. It’s created because of a contractual agreement between the involved parties (the lender and the buyer). This account holds the escrow funds (property tax and insurance) and is only accessible to the lender.
How does a Mortgage escrow account Work?
Like we said in the introduction, the loan servicer is responsible for collecting the mortgage and the escrow funds every month. The escrow fund is usually one-twelfth of the total annual cost of the property tax and insurance.
And so, once your property tax and insurance are due for payment, the loan servicer withdraws the money from the escrow account and pays the fees.
What’s an Escrow Waiver?
An escrow waiver is a quitclaim that relinquishes the loan servicer’s right to collecting and paying escrow fees (the property insurance and tax) on your behalf. Waiving an escrow means that you no longer need to pay your escrow fees (property tax and insurance) to your lender. And that also means that you’ll be responsible for monitoring and paying your dues.
What are the Pros of an Escrow Waiver?
An escrow waiver relinquishes the lender’s power over how you pay your property tax and insurance. It also gives you a sense of control. Yes! That’s enticing, and you can’t wait to apply for a waiver. But before you take the step, have you thought of the other benefits of waiving escrow? In this section, that’s what we’ll discuss. You want to learn more, read on!
Low Monthly Mortgage Payment
Having an escrow account with your lender means that you’re required to be paying your mortgage fee and, at the same time, saving up towards the payment of your annual property tax and insurance. And that means there is an additional fee that adds up to your monthly mortgage payment.
And alternatively, if you have an escrow waiver, you’re not obligated to save up towards the payment of the fees with your lender. And so, you don’t have to pay additional fees with your monthly mortgage payment.
For example, suppose your monthly mortgage loan is $2000 per month and your annual property tax and insurance are $2,400 and $1,200 respectively. If you have an escrow account with your lender, you’d be required to pay $2300 as your mortgage fee per month (monthly mortgage fee plus one-twelfth of property tax and insurance fees). However, if you have a mortgage waiver, you’re required to pay only the mortgage fee, i.e., the $2000.
You can Invest and Earn interest on Your savings
Since you no longer have an escrow account with the lender, you can control how you save up for your property tax and insurance. You can decide to keep the funds in an interest-yielding account, invest it in a profitable business, or even pay a lump sum when the fees are due for payment.
So, if you decide to save up the fees in an interest-yielding account or invest in a profitable business, you have a higher chance of earning interest on the savings than saving up in an escrow account. If you want to move in this direction, ensure you have experience or, better still, you should seek advice from industry experts. That’ll help you avoid flushing your money down the drain because of investing in risky investments.
Reduces Your Fees at Closing
Having an escrow account is conventionally required of every homebuyer at closing. For one, the lender wants to ensure the homeowner can’t be delinquent in fees payment. And so, the lender wants the buyer to save at least a two-month cushion fee towards their property tax and insurance into the escrow account. That increases your expenses at the closing.
But when you apply for an escrow waiver, you’re not required to pay a cushioning fee at closing. And this will reduce your expenses at the closing.
Convenience, Flexibility, and Control
Escrow waiver gives you the convenience, flexibility, and the sense of control to be in charge of your finances. With an escrow account, you need to pay the escrow fee to the lender monthly, and defaulting on one month (even when not due) has consequences. And this translates to the lender having more control over you.
However, with an escrow account, you can decide what works for you. Whether you want to save up monthly for the fee, or you prefer to pay in a lump sum. And so, this provides you with a sense of control. It also gives you the flexibility to do what is convenient for you.
Cons of Escrow Waiver
In the previous section, we discussed the benefits of having an escrow account. Again! That reinforces your decision for an escrow waiver. But you need to understand that knowing only the benefits and not the cons of an escrow waiver gives you a biased view of how it affects you. So in this section, we’ll also discuss the disadvantages of having an escrow account. Without ado, let’s dive in!
You have to Take responsibility
Having an escrow account only requires you to pay an agreed sum to your loan servicer monthly — you don’t have to know how much is in escrow or when your insurance and tax are due. All you have to do is make the monthly payment, and the lender will handle the rest.
However, without an escrow account, you’ll be responsible for your property insurance and tax or any other fees. So, you’d need to have a saving plan and be current with the latest development with tax and insurance. You should also know when your fees are due. These can be a hassle and can have catastrophic results.
Can be a Risky
Not having an escrow account can be bittersweet — it can be risky and beneficial. Since you’re required to handle the fee payment, you need to decide what will work for you. Do you have the financial capacity to pay up at once? Or do you need to set up a saving plan? Not having a roadmap or plan to pay this fee can be problematic.
For example, a homeowner with a saving plan (towards the property tax and insurance) will find it easier to pay up when it’s due. But if the homeowner doesn’t have a savings plan and doesn’t have the financial capability to pay up in a lump sum when it’s time to pay up the due, it can lead to a catastrophe.
Properties without an escrow account are usually considered highly risky. Property owners are likely to default on property tax and insurance. And the lender can’t monitor the payment of those fees, and there is no two-month cushion to cover likely delinquencies.
To discourage homeowners, the lender would likely increase the interest rate on the mortgage. That means you’d be paying more if you have an escrow waiver than when you have an escrow account with the lender.
What are the Requirements for an Escrow Waiver?
As we already said in the introduction, having an escrow account is not compulsory. So if you qualify for a waiver, you can apply for one. Here is a general overview of how to remove an escrow account from your mortgage.
- The loan must be at least one year old.
- You must have a minimum of 20 percent equity in the property, i.e., the loan-to-value (LTV) shouldn’t be more than 80 percent.
- There should be no loan modification in recent times.
- Escrow fees shouldn’t be due in near times, i.e., your property tax and insurance shouldn’t be due for payment in, say, a month or two months from the time of application.
- Don’t default on a previous escrow waiver.
- Don’t be delinquent on your mortgage payment in the last year.
- You must not have a negative escrow.
- You’d need to pay for an escrow waiver fee
Note that the requirements mentioned above are just the general ones — some others are specific to each lender. So if you need to know what’s required of you to qualify for an escrow waiver, ask your lender.
What You Should Consider Before Applying for an Escrow Waiver
So far, in this article, we’ve explained what an escrow waiver is, its pros and cons, and the general requirements to qualify for it. It’s a great ride! However, if you’re still want to waive your escrow, here are some factors you need to consider before making your final decision.
What’s Your Loan type?
Not all loans are the same — loan requirements differ from one another. So when planning to apply for an escrow, ensure you consider your loan types. Some loan provides you the opportunity to use an escrow waiver, while some don’t. Is your loan conventional? Or is it backed by veteran affairs (VA) or by the federal housing authority (FHA)?
The Conventional and the VA loans allow homeowners to apply for escrow if they meet the requirement, while the FHA loan doesn’t (even though you meet all the requirements). However, if you want to use a mortgage waiver with an FHA loan, you should refinance the loan to a conventional loan. That way, you can apply for an escrow waiver.
Do You Have Financial Capability?
The benefit of an escrow account is that it put the lender in control of your property tax and insurance. And so when a problem arises (either you’re delinquent or the fees increase), the lender will be responsible for paying the dues until your payment is adjusted to fit the changes.
However, an escrow waiver means that you’d be responsible for the property tax and insurance. That means whenever a problem arises, you have to fix it up on your own to avoid disaster. Whether you have a payment plan or not, you should have the financial capability to fix any unexpected problem that may arise.
So before applying for a mortgage escrow waiver, ask yourself: Do you have the financial capability for this? Your answer will define if an escrow waiver is a better move or a road to disaster.
After this long read, we believe you now have the necessary knowledge about this real estate term. If you want to apply for an escrow waiver, ensure you answer these questions: Can you handle the financial capability? Or does your mortgage qualify for a mortgage waiver? Your answers to these questions will help you make informed decisions.
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