Banks and the Escrow Float

[ferco]

Since most homeowner taxes are paid (due) at the end of the year, why do homeowners let banks voluntarily hold all this money for a year interest free? I dread calculating the amount of interest bearing float all the banks make over the 11 months before they have to ante up. Have any of the mathematical posters thought about/calculated this HUGE windfall(no labor involved) for the financial institutions.

 

[brewer12345]

It is not insubstantial. I got my bank to forgo the escrow after I had been a good boy for 6 months and they screwed up the insurance part of it. But there is talk of forcing banks to have tax and insurance escrows collected in order to "protect" borrowers.

 

[sailor]

We don't have escrow for taxes/insurance with our Wells Fargo home mortgage

Is it really common to agree to an escrow?
When we applied for the mortgage I said I'll pay insurance and taxes and they did not press the issue.

 

[Darryl]

Huh here is a ball I've dropped

Do I have any leverage to get them to wave the escrow and let me handle the taxes & Ins or is begging followed by a denial the most common practice.

 

[RunningBum]

I said that too, and they actually tried to charge me a fee for the privilege, something like $250. They gave some story that the default rate was higher for people who paid their own taxes so they had to charge the fee to make up for it. I'm pretty sure I argued hard enough to get it dropped. It was either that or some other bogus fee that didn't show up on their original estimate but did on the settlement papers I got a couple days before closing. Whichever one it was, I asked my realtor about it later and she said it was normal in Texas, but by that time the lender had already agreed and removed it.

 

[RunningBum]

Huh here is a ball I've dropped

Do I have any leverage to get them to wave the escrow and let me handle the taxes & Ins or is begging followed by a denial the most common practice.

Once you've got 20% equity you should be able to get them to drop PMI. If you're counting on increased value of your house to reach that, you need a new appraisal. At the same time you can ask them to drop escrow. I'm pretty sure I've done this with an existing loan before.

 

[MikeD]

We had a choice when we got our current mtg: let them escrow or pay a $600.00 fee to get out of it. We let them do it.

Our rate is 4 5/8%.

Mike D.

 

[Darryl]

Once you've got 20% equity you should be able to get them to drop PMI. If you're counting on increased value of your house to reach that, you need a new appraisal. At the same time you can ask them to drop escrow. I'm pretty sure I've done this with an existing loan before.

I've got about a 50% equity position, there isn't any PMI but I do pay taxes and insurance into escrow.

 

[firewhen]

End of escrow

My bank would not let me do it initially, but said I could when my loan to value ratio hit 30%. I am not sure if they factored in appreciation, but since we had put 20% down, when my principal payments added up to the other 10% I called them and they quickly agreed. I was always amazed that states do not require lenders to keep escrow money in interest-bearing accounts.

 

[Darryl]

Guys I was just on the phone and customer service reps went home 17 minutes ago. I'm on this though and will let you know how I do.

 

[jazz4cash]

Good post on a blatently overlooked subject. I always considered this to be a racket. If they require an escrow, they should pay interest on it. When I did have an escrow, it was always too high or too low. All sorts of arcane "rules" to simply discourage homeowners from paying thier own. 99% of homeowners simply go along, or in the throws of getting the mortgage done, don't want to fuss about the escrow. Some, like my in-laws thing the bank is doing them a favor! I've had originators swear it was impossible...simply because they had never been asked about it. In our county we get additional float of 4.5 months as they let us defer 1/2 for 3 months and the 2nd half for 6 months interest free. I live in a high tax area, so it would burn me up to have those funds sitting until the bill hits. Paying your own really makes you THINK about what you're getting for your property tax dollar, too! $600.00 to forego escrow is a lot, but it's still worth it. I hope its a one time fee. I've had several mortgages with GMAC and they were always good about me paying my own.

 

[Lakedog]

I have never had an escrow account -- when shopping for a mortgage, this is one of the first things I ask, and I have never paid a fee to go without an escrow. Always seemed like a racket to me. Of course, I have no plans to ever have a mortgage in the future.

 

[W2R]

I paid $200/month for taxes and insurance over the four years that it took me to pay off my mortgage, after buying my house. That wouldn't have been enough to do much with, so if I had been saving it for these payments it would have been in my savings account.

Assuming that my savings account paid 4-5% interest, I figure that I would have earned a total of about $200 in interest over that four years ($50/year, or $4.17/month).

Unfortunately, my savings account interest rate was much lower in 2002 than it is now, and I remember distinctly that I was earning a whopping 0.2% interest at the time.

Frugality is great, wherever you are willing to cut back. I'm not sure it would be worth the effort, to me.

 

[LOL!]

For folks who do not escrow and think they don't pay a fee ... do you know that you probably have a higher mortgage interest rate because you don't escrow?

Next time you refinance, see if you get the same rate if you don't escrow. Or negotiate a rate without escrowing, then ask, "OK, if I escrow will you drop the rate?"

We don't escrow and we think it helps immensely with tax planning.

 

[jazz4cash]

For folks who do not escrow and think they don't pay a fee ... do you know that you probably have a higher mortgage interest rate because you don't escrow?
.

What would be the basis for such a broad statement? I've never ever seen any evidence of any difference in rates for escrow vs. non escrow. I've only heard some originators hint that there could be a fee for a non-escrow or. I have a firm belief that if your business is desireable and they wish to be competitive, it's probably more of an issue for the broker or servicer.

 

[jazz4cash]

Know escrow rules before waiving them

 

[Sue J]

When we bought our house in 1983 the escrow was required. It was our first home, we put down 25%, but I never thought to ask if the requirement dropped after you reach a certain equity percentage.

Every year the mortgage payment would adjust for escrow shortfalls. Taxes would go up in January and our adjustment would be in June and we'd already be behind and they'd increase our payment. Then after having the mortgage for over 10 years they decided that instead of the escrow being for just what was estimated to be needed they increased the escrow to included a 2 month cushion. So that was spread out over the next 12 months.

One time the escrow took a big jump and when I tried to verify their figures I couldn't get it all to reconcile. I called to ask about it and it turns out they had paid our Real Estate taxes twice. After they corrected for that our escrow made sense.

As soon as we paid off the mortgage I set up an online savings account and send a payment to ourselves every month for 1/12 of the annual taxes and home owner's insurance. It's a good habit to keep but now the interest is ours instead of the mortgage company.

 

[audreyh1]

My husband was on top of this - particularly to drop the mortgage interest coverage ASAP. Once we reached the equity requirement, we took over the taxes and dropped the PMI. I don't remember any extra fee for this, in fact I'm positive there wasn't.

Audrey

 

[ziggy29]

I had an escrow account on the first mortgage I ever had back in 1989. After that, I've never had one since. I'm enough of a control freak about my finances that I don't want to surrender any control if I don't have to.

Of course, now I don't have a mortgage so it's moot, but when I did I had my insurance debited monthly, and each time I had a few extra bucks at the end of the month (or got a bonus check) I put some money into a separate savings account earmarked toward paying the annual property tax. That way I could pay the bill without flinching...much.

 

[Darryl]

Well, I talked with the CCO rep and she tells me the only way to disconnect the escrow and handle it myself is to refinance in to a non-escrowed loan.

If the rates drop another % I'll take a look at that.

 

[growing_older]

I think there may be rules that vary by state, but they are certainly also rules that vary by lender. I've had loans that absolutely refused to consider relinquishing escrow to me, and others that have no problem with it (though they reserve the right to see proof of insurance and current taxes). Some lenders use a LTV trigger, but others it's just policy. Some, (as alluded to in other posts) have interest rate or fee differential for allowing you to do your own escrow. You'll likely just need to be aware of what's being offered by various lenders when you shop for a loan. Sometimes you can call customer service and see what options you have, but if you didn't accidentally pick a lender with favorable policies, you may have to shop for one next time you get a loan.

 

[Texas Proud]

The article from Jazz say it well...

Escrow is to 'protect' the mortgage holder. If the person did not pay the insurance and the house burned down they lose.. if the taxes are not paid and they repo the house.. well, they lose again...

Also remember the vast majority of people we are talking about... they can't save money for ANYTHING... so when it comes to the year end and they have not savings and their CCs are maxed out for Christmas shopping... where is the money coming from

I argued about the fee to be without escrow and they said it was to monitor the property... we send in the insurance rider and they 'check' to see taxes are paid... sounded reasonable at the time...

 

[FinanceDude]

The article from Jazz say it well...

Escrow is to 'protect' the mortgage holder. If the person did not pay the insurance and the house burned down they lose.. if the taxes are not paid and they repo the house.. well, they lose again...

I think companies shoudl take into account the creditworthiness of the client and let that be the guide.

 

[youbet]

There are several landlords posting here on the board. In other threads, there have been discussions of how they use lease terms to protect themselves from tenants causing damage or not paying, etc. I wonder what their comments are on this subject? If they were lending some of their own money to folks to buy a house, what would their requirements be? Would they require an escrow account for insurance and taxes or at least periodic proof submitted that insurance was in place and taxes being paid?

 

[calmloki]

There are several landlords posting here on the board. In other threads, there have been discussions of how they use lease terms to protect themselves from tenants causing damage or not paying, etc. I wonder what their comments are on this subject? If they were lending some of their own money to folks to buy a house, what would their requirements be? Would they require an escrow account for insurance and taxes or at least periodic proof submitted that insurance was in place and taxes being paid?

On the properties we've funded the borrower pays taxes as a part of their payment, we send a check for the taxes to the loan company when due. Borrower lists us as lien holder on their insurance and the insurance company sends us a declaration page. These are often pretty sketchy loans as far as a bank would see them, so i don't feel guilty about holding the borrower's money for them.