Smart Borrower Blog

Tax Escrows: Consider Waiving Them

Sep 19th, 2007 @ 9:34 AM by MortgageMentor

By default, most mortgage lenders will set up a tax escrow on your behalf to handle the property taxes on your home.  When you make your monthly mortgage payment the lender will also collect 1/12th of your annual property tax bill.  When the bill comes due in your area, the lender will pay it on your behalf.  Think of it as a forced savings account.  Lenders prefer you escrow your taxes because it lowers the risk of you not paying them and a tax lien being placed on the property which could interfere with the lenders’ interest in the home.

Most lenders will require mandatory tax escrows when your loan to value is above 80%.  When you have 80% or less, lenders give you an option to “waive escrows” which means you take responsibility for paying the property taxes on your own when they come due and nothing is collected with your mortgage payment.  However, if you structure your financing as piggyback with a second mortgage, you can go to 100% financing without a tax escrow. 

Most loan officers and brokers may not tell you that you may have an option to waive your property tax escrow, so be sure to ask if this is something that interests you.

The Benefits of Waiving Escrows

1. It Lowers Closing Costs
When you escrow taxes, the lender collects a number of months of property taxes at closing to ensure you have enough funds available in the escrow account to pay the first tax bill.  Depending on when taxes are due in your area it could be as little as three months of taxes to almost a full year.  Depending on property tax rates this could several thousand dollars in extra closing costs.

2. It Offers More Control
By waiving your escrows, you give the bank one less item to screw up.   Mortgage servicing companies are notorious for making late tax payments, not paying, or even over paying.  It can be a nightmare to get these mistakes corrected.  I vowed to never escrow my property taxes again after a mortgage lender over paid my annual property taxes by $15,000.  It took more than a month to get it corrected.

In fact, failed mortgage lender American Home Mortgage is now having problems paying their some of their customers’ property taxes.

3. It Enables You to Earn Interest on Your Money
Lenders do not pay interest on the money they keep in your escrow account.  Why should you give your money to a bank and not earn interest on it? 

In my opinion, if you are responsible enough to be a homeowner, you shouldn’t need the lender to force you to save for your property tax bill.  However, if you like paying your tax bill each month with your mortgage payment simply set up an automatic withdrawal into your own savings account instead of handing the money over to the mortgage company.

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