When getting a new mortgage, you’ll need to discuss several different costs involved in purchasing and owning a home.
Included in those expenses are the property taxes, as well as the homeowners insurance coverage you will need. These costs can be wrapped into the costs of your mortgage with an escrow account. An escrow account is sometimes required depending on your loan.
If you have the option to waive escrow, you’ll want to understand what it is, as well as the pros and cons of having an escrow account.
What is escrow?
When you purchase a home with a mortgage, you and your lender will need to decide if you will start an escrow account.
An escrow account holds money that will be used to pay your annual property taxes and homeowner’s insurance premiums. The lender collects this money from you in installments as part of your monthly mortgage payment and retains the funds in an escrow account. From there, the lender manages making the property tax and insurance payments for you, as they are due.
Depending on your qualifications for your mortgage, you may be required to have an escrow account to ensure that certain expenses of owning your property are covered. This presents less of a risk for the lender. If an escrow account is not required, your lender can help you decide if it’s a beneficial option for you.
What are the requirements to waive it?
Escrow is required when purchasing a home with a mortgage in the following situations:
- If the principal balance of the mortgage is 80% or more than the original appraised value of the house. To waive escrow, make a down payment of at least 20% of the value of the house.
- If you are getting a loan that is insured by the Federal Housing Association (FHA). All FHA loans require escrow.
- If you have received a prior change to your mortgage payments, or had previously waived escrow, but then failed to make all payments on time.
- If you have been delinquent on any payments within the past 12 months or have been delinquent for 60 days or more within the past two years.
You can choose to waive escrow if none of these situations apply to you and it’s optional for your mortgage. You will need to provide the lender with proof of payment for property taxes and homeowners insurance. This may include paying for special required insurance, such as flood or earthquake coverage.
How does having escrow or waiving it affect your mortgage?
There are several factors to consider when understanding how having an escrow account or deciding to waive it can affect your mortgage payments.
What happens if you waive it?
A fee is often charged for waiving escrow if it’s optional for your mortgage. These fees can be up to about one-quarter point of interest. They are collected when you close on your mortgage, adding to the closing costs.
Escrow funds often do not earn interest while being held in an account. If you waive escrow, you’ll wait to pay certain expenses until they’re due, in larger sums, instead of paying monthly toward them. Between due dates, you can invest the money you would otherwise be paying to your lender monthly.
You could invest your money to earn interest on it before paying your taxes and insurance on their due dates. Research how much interest could be earned with investments, such as a certificate of deposit or stock fund. Consider that you’ll also have to pay a waiver fee.
Avoid more upfront costs
You won’t have to pay property taxes or homeowners insurance up front at closing. Sometimes, setting up an escrow account involves depositing an amount equal to several months of property taxes at closing. Instead you will pay them on their respective due dates.
What happens if you set up an escrow account?
Depending on your loan and lender, you may get a lower interest rate or lower closing costs by having an escrow account. It ensures for the lender that you won’t be at risk of missing important payments related to owning your home. This gives them more confidence in financing your mortgage.
By paying your property taxes and homeowners insurance in monthly increments, you essentially use an escrow account as a savings account toward these costs that would otherwise be due as large sums each year.
Manage changing expenses
The cost of property taxes and homeowners insurance can fluctuate. If they go higher than initially estimated, the lender temporarily covers the expense and then adjusts your rate over the following months. If the expenses are lower than estimated, you receive a refund for the amount that you paid monthly but that was not needed.
Need help making a decision?
Whether escrow is required for your mortgage or you have the option to waive it, your personal situation and financial needs will determine whether it will be best to pay your property taxes and homeowners insurance directly or through your lender.
Homefinity loan officers can answer your questions to determine what will make your monthly mortgage payments most affordable.Contact us today with questions about escrow and your current mortgage so that you can finance your home and all of the costs that allow you to take the best care of it.