Minneapolis, MN: When buying a home and getting a mortgage loan, the vast majority of people simply include the homes property taxes and insurance in the payment. But if you put at least 20% down payment on a conventional loan, you can opt to pay your own taxes and insurance. While only a small number of people choose to pay their own taxes and insurance, those who choose this option are usually shocked to learn there is something known as an escrow waiver fee.
I’m not a fan of the escrow waiver fee, but it is not something I charge, it is not something our company charges, it is something that Fannie Mae and Freddie Mac charge, so all lenders have to collect it and pass it on to the home owner.
The escrow waiver fee is something known as a loan level pricing adjustment (LLP). It is charged because of the added risk FROM PEOPLE WHO DO NOT PAY their taxes and insurance when due.
I know, I know, you’ll be fine, and will pay when due. But you’d also be surprised at the number of people who do NOT pay their taxes and insurance on time. This creates additional risk on the loan. Anytime there is additional risk, expect to pay more.
HOW MUCH IS THE ESCROW WAIVER FEE?
Your escrow waiver fee used to be a flat 0.25% of your loan amount. So on a $200,000 loan, you could possibly pay an additional $500 on top of all your standard loan closing costs.
Recently, that has change a bit, and can be as little as 0.10% for excellent credit clients.
An alternative option is the lender will increase your loans interest rate to cover the cost. Generally this means a 1/8th (.125%) higher interest rate, which ends up usually costing you more than the one time fee.
I do see some lenders claiming they don’t charge the escrow waiver fee. This is smoke and mirrors, as the fee is a Fannie Mae / Freddie Mac charge that we must pass on. Therefore any lender claiming they don’t charge it is simply bumping up the loans interest rate or costs without telling you. This is sometimes rather effective, because most people are vary unhappy to learn about the fee, so they fall prey to anyone claiming not to charge it.
ASK YOUR LOAN OFFICER FOR QUOTES BOTH WAYS
IS IT WORTH PAYING THE ESCROW WAIVER FEE?
In my humble opinion, no. The cost just isn’t worth it for most people. But with the costs being lowered recently for those with excellent credit, it may be a much smaller cost, and therefore it might be OK.
THE LENDERS ALWAYS SCREW UP ESCROW ACCOUNTS
The number one reason I hear for homeowners not wanting to escrow for taxes and insurance is because they feel the lenders always screw up the escrow accounts! Do they on occasion? You bet. But more often than not, it is the consumers failure to understand versus a lender mistake. (Don’t kill the messenger)
I’ve gotten them. I know how it feels, and it stinks to get the letter in the mail from the lender telling you your escrow account is short, that your monthly payments are going up, and to write them a big check today for the shortage.
Its easy to understand why people get upset. But it is actually usually their own fault, not the fault of the lender.
Lenders are required to review escrow accounts once per year.
If you get your insurance renewal, with your home owners insurance is going up. Take note of that increase. You should immediately calculate the new number, and start paying the additional difference monthly to your escrow account. Who does that? Nobody.
The same with property taxes. If your taxes are going up, your mortgage payment will eventually go up too. If you didn’t start adding the additional taxes divided by 12 to your monthly mortgage payment, expect to be shocked when you get your annual escrow review notice.
Funny how no one complains when their taxes or insurance goes down, and they get an escrow account overage check in the mail?
I CAN MAKE INTEREST ON MY ESCROW MONEY?
Unfortunately, your escrow account does not make interest, so making money on your money (interest) while still in your account versus the lenders account is a prime reason I hear for why people want to pay their own impounds.
I hear many people talk how much they can save, or potential interest they will make by keeping their escrow money in an interest bearing account until the last minute.
This is very logical on the surface, but is it really worth it for most people?
First understand that the lenders doesn’t have all that money of yours at one time. It is collected over time. If your total taxes and insurance is $5000 a year. the lender doesn’t hold $5000 all year. It slowly builds up.
Here in Minnesota, we pay property taxes twice a year. So the lender collects one month, then two, then three, etc. After 6 months, the property taxes are paid, and the escrow account balance drops back down, only to slowly move back up until taxes are paid again in six months.
So unless you are a super financial wizard with awesome interest bearing accounts, or have huge impounds for taxes and insurance, it is very unlikely most of us would ever re-coop the cost of the initial escrow waiver fee.
Especially if your money is just in basic checking, savings, or money market accounts. Most checking and savings accounts pay virtually nothing, and even the best money market accounts as of the day I write this are only paying about 1.50% APY.
WHEN CAN I DROP PAYING MONTHLY ESCROWS?
Generally speaking, if you start your conventional loan paying escrows, you can ask the lender to let you pay them yourself once your loan falls below 80% of the original balance, AND 5-years have passed, then you can ask to stop paying escrows without any additional cost.