Q:What is an escrow waiver fee?
The Escrow Account
The common protocol of mortgage lenders is to setup an escrow account. When you make your mortgage payment, a portion of the payment goes toward paying the principal and interest. The other portion goes into an escrow account to pay for your property taxes, homeowners insurance, and other expenses such as flood insurance, ground rents, and mortgage insurance, if applicable. When these accounts become due, the funds are withdrawn from the escrow account to pay for these expenses. Essentially, as long as you make your mortgage payment, you do not have to worry about independently paying your taxes, insurance or other payments that are placed in an escrow account.
You may be thinking that a benefit of an escrow account is that it can gain a small amount of interest as the money sits in the account. Unfortunately, this is not the case in many situations. Banks are not required to pay interest on escrow accounts in many states. However, you may be able to receive interest in an escrow account in the following 15 states (source):
- New Hampshire
- New York
- Rhode Island
What is an Escrow Waiver?
When you request an escrow waiver from your lender, you are telling the lender that you do not want an escrow account. This means that you will independently pay for the items that would normally be in your escrow account like taxes, insurance, mortgage insurance, and so on. If the lender or law permits an escrow waiver, it is your responsibility to make the payments on these accounts.
Some lenders may have certain requirements that must be met before an escrow waiver is granted. An example of these requirements may be a certain amount of reserves verified or at least a 20% down payment/equity in the property.
How Much is an Escrow Waiver Fee?
It is not uncommon for lenders to charge a fee for a borrower to obtain an escrow waiver. The typical escrow waiver fee is approximately .25% of the amount you borrow. For example, a $200,000 mortgage would have a $500 fee ($200,000 x .0025 = $500). Some banks have a minimum fee that they charge such as the greater of $150 or .25% of the loan amount. The $150 would be bare minimum fee that you would be charged.
Why An Escrow Waiver?
The escrow waiver allows you to earn interest on your money in your own account until your bills (taxes, insurance, etc.) come due. Considering many escrow accounts pay little or no interest, keeping your money in your own interest-bearing account may be somewhat beneficial. However, the problem is that the interest you earn on this money will likely be minimal since most people cannot afford to be risky to earn a respectable rate of return. For most people, it will take years to earn back the escrow waiver fee from earned interest in a traditional savings or a similar account.