A mortgage escrow account is a reserve account held by the mortgage servicer on behalf of the homeowner, and contains the homeowner’s funds that are used to pay the annual property taxes and homeowners insurance when the bills come due. While these funds technically belong to the homeowner, the homeowner can’t access the funds in this “piggy bank” until the mortgage balance is paid in full – at which point all unused funds are returned to the homeowner. See Escrow Accounts Explained in Detail for more information on what makes up an escrow account.
WHEN IS AN ESCROW ACCOUNT REQUIRED
An escrow account is required for all FHA, VA, and USDA loans as well as Conventional loans where the LTV is greater than 80%. An escrow account ISN’T required when a conventional loan in a first lien position is at 80% (or less) of the home’s value. (For purchase loans the value is determined by the lessor of the purchase price of the appraised value).
MONTHLY PAYMENTS – PITI vs. P&I
“PITI” is an acronym for Principal, Interest, Taxes, and Insurance (and in pronounced “P-I-T-I”… not “pity”). When escrows are included in a loan the monthly mortgage payment is called PITI because it includes 1/12th of the annual insurance premium and 1/12th of the annual estimated taxes. If someone elects to “waive” escrows then the monthly payment will only contain the P&I, principal and interest, and the annual tax and insurance bills will be the responsibility of the homeowner. Note: HOA dues will never be a part of the monthly payment; however, if Mortgage Insurance (MI) is required for a loan then it too will be a part of the PITI.[/one_half]
ESCROW WAIVER FEE
Fannie Mae and Freddie Mac both charge an escrow wavier fee of .25% (or .0025). This means if someone wants to borrower $200,000 on a $250,000 purchase price the cost to waive escrows will be $500 (200,000 x .0025). That said, you may not be required to pay that escrow waiver fee depending on the rate and lender. If you are charged an escrow wavier fee then request that it be shown as a discount point so you can deduct it from your taxes.
PROS AND CONS
- Are you a good saver? When waiving escrows that means that you’ll ultimately have to pay the full year’s tax payment at year-end as well as your annual insurance premium when it renews. If you’re not in the habit of saving (or just don’t want to mess with it) then you have an escrow account.
- Do you have a steady and predictable income? If you’re a “normal” salaried employee then an escrow account may not be a big deal since your income is constant and predictable. If you’re commission-based, receive bonuses, or self-employed then waiving escrows may help you with monthly cash flow and allow you the flexibility to put away lump sums of money on “good” months.
- What’s it worth to you? If you’re still on the fence then perhaps you should have the escrow account to simply matters and avoid the potential escrow waiver fee. Occasionally a borrower may decide to waive escrows because they want to “earn interest” on their money. My only “argument” to this is logic is how much interest do you really expect to make and what’s all that work worth?
Whether someone has an escrow account doesn’t matter to how we originate the home loan; however, we are here to provide an opinion based on your circumstances and you’re welcome to call us if you have any questions.
- Escrow Details Explained – this page provides more details on escrow accounts as well as examples of what to expect.
- Escrow Analysis – check out our video on how mortgage servicers do an escrow analysis and what that means to you.
- Prepaids – prepaids are not technical not fees; they are the cost of home ownership. Prepaids are the per diem interest, first year’s homeowners insurance, escrow account, and any per diem HOA dues.