Can I Cancel My Escrow Accounts?

Real Estate Mortgage EscrowI recently had a situation where the lender on my personal home sent a letter saying that our escrow account was short. Like, a lot short. It turns out the lender didn’t follow its normal method of contacting us, so we had no idea once our taxes were paid for 2020 that our escrow accounts were not going to have enough money remaining in it.

What, by the way, IS escrow?

Escrows are a way for anyone with a mortgage to set aside monies for their taxes and insurance to be paid. Each month, as part of your mortgage payment, a portion goes to the lender to pay the principal and interest on your loan, and a portion is set aside in “escrow” for your taxes and insurance. When those two things come due the lender pays them out of your escrow account. And – according to this Corelogic article from 2017, and my own experience with buyers at the closing table – the vast majority of buyers establish escrow accounts.

The whole experience, while minor in the grand scheme of things, was a frustrating waste of time involving phone calls and bad Muzak. And it got me thinking, can I get rid of my escrows? Specifically, now that I have the loan we refinanced into last year, can we just drop the escrows and pay our taxes and insurance ourselves when they come due?

It turns out you can’t. Escrow accounts aren’t required for most borrowers, but once a loan is established with escrows, no lender wants to take a lower payment than they’d originally expected to because a borrower suddenly decides that they want to pay their taxes and insurance on their own. I’d happily pay my own taxes and insurance if it meant not having to be concerned that an unexpected assessment, or an increase in a variable cost somewhere, meant avoiding the headache of dealing with an automated phone queue. We COULD refinance into a new loan (and an even lower rate than last year), but that would involve closing costs and an increase in our loan amount, and doesn’t align with our family’s financial goals.

So for now, we’ll pay the shortage and continue on. But if the time comes that we decide to refinance, there’s a better than not chance we’ll be doing it with no escrows. If you’re considering a refinance, or new purchase loan, it just might make sense for you to talk with your lender about doing the loan without escrows, as well.

You’d at least avoid the Muzak.


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