Should you negotiate out of escrow

Nearly all lenders require low-down-payment borrowers to pay homeowners insurance premiums, HOA fees, and property tax payments into a lender-managed escrow fund. Even some low LTV borrowers are required to pay taxes and insurance into escrow accounts. Account balances can reach $5,000 to $10,000 or more. Yet many lenders pay no interest on these funds. Even worse, I've seen lenders charge borrowers administrative fees for the privilege of letting the bank keep their money for them. Although lenders may claim otherwise, in fact no law or regulation requires borrowers to pay into an escrow account. I recently saw an escrow statement with this heading:

Initial Escrow Account Statement

Required by Section 12(c)(1) of

Real Estate Settlement Procedures Act (RESPA)

RESPA requires the account statement; it does not require the escrow account. It is your loan agreement that may impose that requirement. As such, you are free to ask the lender to withdraw its demand. Borrowers with strong credit profiles and low LTVs can press their cases hardest, but if the lender won't remove the escrow requirement, ask for a respectable rate of interest to be paid on escrow balances. Or, you could buy a certificate of deposit in an amount that exceeds all sums needed for the escrow account, then pledge that CD to the lender and pay your taxes, insurance, and HOA fees yourself.

HUD receives piles of complaints about escrow. Here is a sample:

  • Escrow waiver fee: Some lenders charge several hundred dollars to waive their escrow account rules. Don't pay it. Pure garbage.
  • Overcollection: HUD limits the amount that lenders can collect and hold in your escrow account. Generally, lenders may hold a two-month reserve plus accrued pro rata total expenses (usually 1/12 each month) for disbursements that year. To calculate legal maximums, go to the FAQ section on escrows at hud.gov. You'll find an easy-to-use fill-in-the-blank worksheet.
  • Discounts and late fees: Your insurer, property tax office, or HOA may offer discounts for early payment and assess late fees against tardy debtors. At present, no law requires lenders to pay your bills according to a time schedule that guarantees you the available discounts. When the lender snoozes, you lose. Until proposed federal legislation passes, you must cajole and complain to make sure you don't pay more than necessary.
  • Return of escrow money: No law or regulation currently requires lenders to return your money in a timely manner after you pay off your loan (refi, property sale). Often 30 to 90 days may pass before a clerk in mortgage servicing decides to cut you a check. This, too, may change with new laws. Until then, cajole and complain. Certainly, try to get your check at closing. But to see it, you must request it.

"Why worry over a few hundred dollars?" you might say. But would you complain to your grocer, dentist, and dry cleaners if their practices cost you an extra "few hundred dollars" a year? Sure you would. So, display the same moxie when dealing with your mortgage lender.

One final point: To make escrow accounts more acceptable to borrowers, in exchange, some lenders offer to drop the borrower's mortgage interest rate by 1/8 or even 1/4 percent. Now that's an offer worth taking. Ask your loan rep about this possibility.

SECRET # 105

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