An escrow account is a deposit account funded by the buyer that the lender uses to make insurance and tax payments. Lenders generally require them and establish them at settlement.
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Lenders use escrow accounts to protect themselves by ensuring that taxes and insurance are paid on time. If taxes on the house are not paid, the tax authority's lien has higher priority than the lender's lien. If the house burns or floods, the lender's protection disappears as well if insurance hasn't been paid.
Escrow accounts typically have more money than the lender actually needs to give the lender a "cushion." The Housing and Urban Development, or HUD, has placed caps on the size of an account so the deposit can't exceed the amount to prevent the balance from falling below 2 months worth of tax and insurance payments.
Avoidance
By avoiding escrow accounts, buyers can collect interest from money that would have been kept in them. A more important reason is to retain control over payments. If a lender makes a payment mistake, it can be bad news for the buyer to try to fix.
There are several ways to avoid escrow accounts.
If your down payment is 20% of the home's value, the lender will usually allow you to forego the escrow account because you have enough self-interest to make the tax and insurance payments on time.
If you put down less than 20%, it may be more difficult. Some states allow you to waive the escrow account for a fee – usually 1/4 to 3/8 of a point – although not all are allowed to do so.
If you already have an escrow account, appeal to the lender to close it. If the mortgage has been transferred, the service agent is making money from a servicing fee and interest earnings from the account. Making it clear to the agent that you are willing to refinance if the account is not terminated may get results because an agent would rather lose the interest alone rather than the servicing fee as well as the interest.