When you’re a homeowner with a mortgage, you might notice that a portion of your monthly payment goes into something called an escrow account. This account is used by your lender to pay your property taxes and homeowners insurance. While escrow helps ensure these essential bills are paid on time, many borrowers ask whether they can remove escrow from their mortgage. The answer depends on several factors, including your loan type, lender policies, and equity in the home. Understanding how escrow works and whether removing it is the right decision for you can help you manage your mortgage more effectively.
Understanding Escrow Accounts
What Is an Escrow Account?
An escrow account is a financial arrangement where a mortgage lender collects money from the borrower each month to cover expenses such as property taxes and homeowners insurance. Instead of the homeowner paying these bills directly, the lender makes the payments on their behalf using the escrowed funds. This process protects both the lender and the borrower by ensuring essential obligations are paid on time.
How Escrow Affects Monthly Mortgage Payments
When escrow is included in your mortgage, your monthly payment consists of:
- Principal the loan amount you borrowed
- Interest the cost of borrowing the money
- Property Taxes estimated annual taxes divided into monthly installments
- Homeowners Insurance annual premium divided into monthly payments
The last two components are managed through the escrow account. Each year, the lender reviews the escrow balance to make sure enough is being collected to cover the payments.
Can You Remove Escrow from Your Mortgage?
Is It Allowed?
Whether you can remove escrow from your mortgage depends primarily on your lender’s policies and your mortgage agreement. Not all lenders allow escrow to be removed, especially if your loan is backed by government entities like FHA or VA. However, conventional loans often offer more flexibility.
General Conditions for Escrow Removal
Lenders usually consider removing escrow if the borrower meets certain criteria:
- Loan-to-value (LTV) ratio is typically 80% or less, meaning you have at least 20% equity in your home
- A strong history of on-time mortgage payments, often for at least 12 months
- No delinquent taxes or outstanding insurance claims
- Loan is not in default or delinquency
These conditions show the lender that you are financially responsible and capable of handling tax and insurance payments independently.
How to Request Escrow Removal
Step-by-Step Process
If you meet the eligibility requirements, here are the steps you can take to request the removal of escrow from your mortgage:
- Review your mortgage documents to check for any escrow requirements
- Contact your mortgage lender or servicer to ask about their escrow removal policy
- Submit a written request or complete any required forms
- Provide documentation showing sufficient home equity and payment history
- Wait for lender approval; some may charge a fee for processing the removal
Approval is not guaranteed. Even if you meet all the conditions, your lender may still deny the request based on internal guidelines.
What Happens After Removal?
If escrow is successfully removed, you become responsible for paying property taxes and insurance premiums directly. This means budgeting carefully and making sure these bills are paid on time each year. Missing these payments could put your home at risk and even cause your lender to re-establish the escrow account.
Benefits of Removing Escrow
Greater Financial Control
One of the biggest advantages of removing escrow is the ability to control when and how you pay your property-related expenses. You can:
- Shop around for better insurance rates without restrictions
- Earn interest on the money you would have deposited into escrow
- Avoid surprises from annual escrow shortages or increases
This flexibility can be appealing to homeowners who are financially organized and prefer to manage their expenses directly.
More Predictable Cash Flow
Some borrowers feel frustrated when escrow adjustments cause their monthly mortgage payments to change. Removing escrow eliminates these adjustments, leading to a more stable and predictable principal and interest payment.
Drawbacks and Risks of Escrow Removal
Increased Responsibility
Handling your own taxes and insurance means keeping track of due dates and setting aside money in advance. Failure to pay on time can result in:
- Late fees or penalties from your local tax authority
- Lapse in insurance coverage, which may violate your mortgage terms
- Forced placement of lender-selected insurance, often at a higher cost
This added responsibility may not be ideal for homeowners who prefer automatic management through escrow.
Loss of Convenience
Many homeowners appreciate the convenience of having taxes and insurance included in one monthly mortgage payment. Removing escrow means you now have to remember multiple payment schedules and manage larger lump-sum expenses throughout the year.
When Escrow Removal Might Not Be an Option
Government-Backed Loans
FHA, VA, and USDA loans typically require escrow accounts as a condition of the loan. These types of mortgages are designed with built-in protections for both the borrower and the government entity backing the loan. Removing escrow is generally not permitted with these types of loans.
Low Equity in the Property
If you have less than 20% equity in your home, your lender is unlikely to approve an escrow waiver. Low equity means greater risk for the lender, and escrow helps protect their investment by ensuring taxes and insurance are always paid.
Alternatives to Removing Escrow
Escrow Review or Adjustment
If you’re concerned about high escrow payments, you can request a review of your account. The lender can reassess tax and insurance estimates to ensure the correct amount is being collected. This might lower your monthly payments without removing escrow entirely.
Refinancing Your Mortgage
Another option is to refinance your mortgage with a new lender that does not require escrow. During the refinancing process, you can request to waive escrow, provided you meet the lender’s requirements. This gives you more control but may come with closing costs and a new loan structure.
Removing escrow from your mortgage is possible in many cases, especially if you have a conventional loan and a strong financial history. It can offer benefits like more control over your money and freedom to shop for insurance. However, it also comes with added responsibility, and not all borrowers are comfortable handling taxes and insurance independently. Before making any changes, it’s important to weigh the pros and cons carefully, check your eligibility, and consult with your mortgage lender. By understanding how escrow works and what your options are, you can make a decision that fits your financial goals and management style.