Escrow: keep it or waive it?

What is an escrow account?

An escrow account is held by your loan servicer to pay your property taxes and homeowners insurance. Each month, part of your mortgage payment goes into it. When a tax bill or insurance renewal comes due, the servicer pays it from the account.

That's why your monthly payment is more than principal and interest. Your full monthly payment breaks down each piece.

How much goes into escrow at closing?

At closing, you make a starting deposit so the account has enough to pay the first bills on time. That's usually two months of homeowners insurance and a few months of property taxes, depending on when the next tax bill is due. It's separate from the first year of insurance you pay up front.

The deposit is listed on your Loan Estimate and Closing Disclosure as part of your prepaid items. Closing costs shows where it sits.

Why does your escrow payment change?

Once a year, your servicer reviews the account and compares what it collected with what it paid. If your taxes or insurance went up, your monthly payment goes up, and you may be asked to make up a shortage. If they went down, your payment can drop, and you may get a refund.

The first year after you buy is when the change is most likely, because the home may be reassessed at your purchase price.

Can you waive escrow?

Often, yes. With a waiver, you pay your property taxes and homeowners insurance directly to the tax office and insurance company. Your monthly mortgage payment covers only principal and interest, plus any mortgage insurance, and you don't make the escrow deposit at closing.

Many lenders limit it. They often require escrow on government-backed loans like FHA and VA, want a certain amount of equity before they'll waive it on a conventional loan, and charge a fee or a slightly higher cost for the waiver. We can waive escrow on VA loans and on conventional loans up to 95% of the home's value, and we don't charge a fee to waive it. FHA loans always require escrow. Your Mortgage Advisor can confirm whether your loan qualifies.

Should you keep escrow or waive it?

Keep escrow if you'd rather not think about these bills. The servicer pays them on time, your monthly payment is predictable, and you won't face a large bill you forgot to save for.

Waive it if you're disciplined about saving and want control of the money. You'll need to set aside enough each month to cover bills that can be large, and pay them on time. A late tax payment can bring penalties, and a lapsed insurance policy can lead your lender to buy coverage for you at a much higher price.

Waiving also lowers your cash to close, since there's no escrow deposit. If cash at closing is tight, that can matter, but it doesn't change what you'll owe for taxes and insurance over the year.

Can you drop escrow later?

Sometimes. Many servicers will let you cancel escrow after you've built enough equity and made your payments on time for a while. Each servicer has its own rules, so ask yours once you're a year or two into the loan.

Quick answers

What is an escrow account on a mortgage?

An account your loan servicer uses to pay your property taxes and homeowners insurance, funded by part of each monthly payment.

Can I pay my own property taxes and insurance instead of using escrow?

Often, yes, except on FHA loans, which always require escrow. Many lenders limit waivers on VA loans and loans with little equity, but some, including us, can waive escrow on those loans too.

Why did my escrow payment go up?

Usually because your property taxes or homeowners insurance went up, and the yearly review raised your payment to cover them.

Does waiving escrow save money?

It lowers your cash to close and your monthly payment, but you still pay the same taxes and insurance yourself. Some lenders charge a fee for waiving. We don't.