Clark Howard

Should I Close My Mortgage Escrow Account?

If you have an escrow account with your mortgage, there may come a time when you get the option to remove it. But should you do it?

A listener of the Clark Howard podcast recently asked the money expert whether it made sense to close a mortgage escrow account after his bank contacted him about it.

Knowing the profits they get from such accounts, Clark says he's surprised that a financial institution even let the homeowner know that he had the option to end the escrow.

What Is an Escrow Account and How Do They Work?

An escrow account is an account that your mortgage bank requires you to fund in order to pay the homeowners insurance premiums and property taxes. But Clark says the banks end up making money on the deal.

“Escrow is a profit center for the banks on mortgages where you make an interest-free loan to them all year long,” Clark says. “They’re allowed under regulations to excess-collect from you, so they’re earning money that’s not even going to be used to pay taxes and insurance.”

The good news is that an escrow account can be closed once you reach the eligibility point. Some factors that could make you eligible to have your escrow account removed include:

  • Attaining a certain amount of equity in the home.
  • Paying an escrow waiver fee, which we'll discuss later.

Should I Close My Escrow Account?

Yes, if given the option from your lender, you should consider closing the mortgage escrow account, Clark says.

Note that some lenders will charge a fee to do that. According to Rocket Mortgage, it's "equal to a small percentage of your loan amount."

Not sure whether you'll have to pay an escrow waiver fee? Contact your lender about specifics pertaining to your individual case.

“Some lenders will say, ‘Hey, we’ll charge you a quarter-point to remove this,” Clark says. “But if they’re just saying, ‘You’ve reached the eligibility point. You can remove your escrow,’ as long as you never forget to pay your taxes or insurance, go for it.”

As you see, Clark qualifies his answer with a major caveat: "as long as you never forget to pay your taxes or insurance."

Once you close your mortgage escrow account, it’s your responsibility to pay the taxes and insurance on your home directly to the government and your insurer. If you don’t think you’ll remember to do that, Clark recommends that you leave the account open and continue to pay into it.

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