Escrow Impound Accounts: Do You Have a Choice?

Escrow impound accounts are those accounts which lenders set up to collect "up-front" money from you when you take out a mortgage to cover future expenses such as property taxes and insurance. Lenders like to set up these impound accounts, as they are then certain that the property taxes and insurance will be paid on time, as they will be holding the money and paying these expenses for you. You can typically waive escrows on a conventional loan if your loan-to-value ratio is 80% or less. The key point is to convey to your lender or mortgage broker from the start that you choose to waive the escrow account option.

The lender may charge you an additional ¼-point for this option to waive escrows. This is not an increase in the interest rate, but rather a one-time charge. If your loan is for $l00,000.00, for example, and you are paying no points, you would pay $250.00 for the privilege of waiving the escrow impound account. In the long run it may well be worth it. It is very difficult to get a lender to cancel the escrow impound account once it is in place, and difficult to get the lender to pay out any interest accrued on the money. Only about 14 states have passed legislation that requires the lender to pay interest on your escrow funds held in these accounts. In some states, lenders allow buyers to set up separate accounts into which they place a certain amount of money and then pay the insurance and property taxes themselves. These are called pledge accounts, and they must be set up before you close on the house.

If you change your mind before the close of escrow regarding your escrow account, you can ask the lender to redraw your loan documents, but they will charge you a fee for this and it would delay your closing. It is best to make a decision regarding the escrow account option before you start shopping for a loan.

If you do choose to allow the lender to collect for escrow accounts, keeping track of your escrow money may become difficult. Many loans are sold in the secondary money market and the original lender you contracted with may not be the lender you are dealing with today. You definitely loose control of that money once the lender has collected it from you.

In some cases you may find that the lender did not pay the hazard insurance or property taxes on time and you receive a cancellation notice or penalty assessments. In this case, you would need to contact your lender, sending along a copy of the bill. The lender should pay the penalty for not paying the taxes or insurance on time.

Escrow impound accounts do have their advantage to some borrowers, however, in the case where you do not want to be bothered to plan ahead and save to pay the property taxes and insurance. When the lender collects this money from you each month, you don't have any worries when these expenses come due.

You may feel that your lender is requiring you to place more money than necessary into the escrow account. Typically, lenders collect a two-month cushion for taxes and insurance. There is a law that governs the lender’s ability to collect escrow money and if you have a specific complaint you can contact the Department of Housing and Urban Development or the State or Federal financial regulators.

This information contained herein is designed to provide accurate and authoritative information in regard to the subject matter covered. It is given with the understanding that the author is not engaged in rendering legal service. If legal advice or other expert assistance is required, the services of a competent legal advisor should be sought.