Should You Waive Escrows?
Perhaps you have found that it is possible to waive some or all escrows for your loan. Should you?
Escrowing money each money for property taxes, property insurance and other items (PMI, flood insurance) is designed to make sure that the taxes and insurance is paid timely and there is sufficient money available to do that when each payment comes due. For many, many borrowers it is easier to budget a set amount each month and pay that instead of paying a large amount at an inconvenient time during the year. Are your property taxes due just when Christmas bills come in? If you are not very disciplined in money management or don’t typically have a reserve of money available, escrowing may be best for you.
Other borrowers want control of the payment of taxes and insurance. These individuals don’t like others holding their money. These borrowers can make sure taxes and insurance are paid on time.
In either scenario, the borrower should receive a copy of the property tax bill(s) and notices when payments are due. The borrower should also receive insurance renewal information from the insurer and have the option to shop for different, less expensive coverage at any time (just remember that any change is insurance must be given to the lender and the lender must be named as an additional insured with the phrase “its successors and/or assigns” (abbreviated ISAOA usually), so don’t forget to tell the lender if you change insurance companies.
What advantages are there to escrowing taxes and insurance? If the taxes or insurance aren’t paid timely, the lender/servicer is on the hook for any penalties, fees, or interest charged, not the borrower. If you are delinquent in your mortgage payments though, you are responsible. If there is a jump in the amount of taxes and insurance cost, there may be a shortage in your escrow account (there isn’t enough money set aside to pay the bill when it comes due). Under a number of conditions, the lender will allow you up to 12 months of smaller, additional payments to make up the shortage instead of having to come up with a large chunk of cash immediately. This isn’t always the case and the lender can request the money be paid in 30 days or allow the borrower to voluntarily contribute in less than a 12 month period.
If you are delinquent and the loan is owned by Fannie Mae or Freddie Mac, these entities may require the servicer to advance the money (charging the borrower of course) to protect the property from foreclosure for taxes or becoming uninsured. In these cases, you may not have been able to make the payments as agreed, but the insurance continues and the home won’t be lost for unpaid taxes. If you are in bankruptcy, you also may have funds advanced for your benefit. Other lenders may not have the same strict requirement, but there is a general interest to protect the value of the property by advancing funds.
If the lender/servicer fails to make payments of taxes and the home is foreclosed, the borrower has the ability to sue and likely recover money damages and other damages from the lender/servicer. If the home experiences a casualty (fire, or other non-flood event) when the lender/servicer failed to make insurance payments, the borrower also has the ability to sue and likely recover money damages and other damages from the lender/servicer. However, if you are delinquent on the mortgage payments, including the escrows, the lender might not have advanced money to pay taxes and/or insurance and the borrower might not be able to sue and receive damages from the lender/servicer. You need to know what the lender has done if you become delinquent. If you can’t pay the entire payment, you may want to consider making sure that the taxes and insurance are kept current at a minimum.
What disadvantages are there to escrowing taxes and insurance? You are not in control of the payment of taxes and insurance. Normally the lender is required to take advantage of any discounts for paying taxes prior to a due date. For example, In Florida, the real estate taxes are based on a calendar year and taxes are due in March of the next year. But a discount in the amount due is provided for each month prior to March that the payment is made. If taxes are paid in November, the borrower gets a 4% discount on the tax payment. Do you know if your lender made the payment timely and got the discount? Unless you read your yearly escrow analysis carefully, it’s doubtful you know. You may be able to find out by going to the assessor’s website to see when the tax payment was made and in what amount. If the escrow balance wasn’t sufficient (perhaps taxes jumped in the year and the escrow account didn’t quite have enough money), the discount might be lost. Did the lender pay the insurance renewal timely? Cases where this wasn’t done and the house burned down do happen and this creates its own problems. You may not know if your insurer paid timely, but you should get a notice that your insurer. Don’t assume the lender/servicer is going to fix it without your input. Call the servicing department (specifically the escrow area for taxes/insurance). Large lenders/servicers dedicate people just to managing the escrow accounts and tax/insurance payments.
The lender is allowed to keep a cushion equal to 2 months of payments of the tax and insurance costs (1/6th of the annual amount). So the borrower may always have excess money in the escrow account. If there was a shortage due to a jump in the costs of perhaps taxes, the borrower would not only have an increase in the monthly payment to make up the shortage, but also an increase in the monthly payment to grow the balance to a point equal to an extra 2 months of the forecast next year amounts due. It may be a double hit to the monthly payment.
Also, the borrower may not pay attention to the tax and insurance bills as closely since the lender is making the payments. Did insurance costs jump? Many insurers have teaser rates for the first year followed by a 10-20% increase the second year or multiple years after. Did the borrower take advantage of all the possible exemptions/discounts? Many jurisdictions provide exemptions or discounts if the property is your permanent home (homestead exemption), the borrower is over 65 (senior exemption), the borrower is disabled (disabled exemption), a veteran (veteran exemption). Circumstances change and many borrowers go with the status quo instead of re-evaluating each year when the bills come in if they don’t pay the bills directly.
Each year, the lender is required to provide an analysis of the escrow account. This includes all the deposits, payments and estimates of future payments to estimate how much money must be added to the escrow account each month (remember, the monthly payment is principal/interest to repay the loan plus taxes plus insurance). It’s likely the analysis causes confusion as many lender/servicer’s systems don’t produce user friendly documents for the average person to review.