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FAQ #8 ........... Do I Have To Escrow My Taxes & Homeowners Insurance

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

My Frequently Asked Questions #8 for the ActiveRain contest that Anna 'Banana' Kruchten established in which we are to respond to the 10 most frequently asked questions that we are asked most often, is one that I get more often from existing homeowners than I do from First Time Homebuyers.  FAQ #8 has really a Yes and No answer.

"FAQ #8 ......... Do I Have To Escrow My Taxes & Homeowners Insurance?"

The Yes answer to this question, is that a Borrower can pay .125 points to not escrow for their taxes, and .125 points to not escrow for their homeowners insurance.  But, and you knew there would be a but, many Lenders will not do a mortgage without the homeowners insurance and taxes being escrowed through the Borrowers monthly mortgage payment.

The reason why Lenders will not allow a Borrower to pay their homeowners and taxes on their own is because:

  • Of the additional risk - If the Borrower does not pay their taxes the town/city will place a tax lien against the property, and the Lender will no longer be in the first position if the Borrower defaults on the loan.  Also if the Borrower does not pay their homeowners insurance, and their is a fire that destroys the property, the Lender is left with a worthless asset.
  • Investor requirement - Many investors will not purchase the mortgage for the same reasons above, therefore, the Lender will not do a loan that they do not have the option to sell later.

I have never understood why a Borrower would not want to escrow their taxes and homeowners insurance.  Those that do not want to escrow for taxes and homeowners insurance will always make the following statement "Why should I let the Mortgage Company use my money, I will put it in the bank and be the one to earn interest on it in stead of the bank".  This may sound good but it real isn't a valid reason.

Escrow Accounts are governed by the State Banking Commission, as a result:

  • Lenders can not use Borrowers Escrow Account Fund for anything else but to pay for the items that the money was escrowed for.
  • The State Banking Commission sets an interest rate yearly that Lenders are mandated to pay on Escrow Accounts.  The interest rate that is established by the State Banking Commission is equal to or greater than the average interest rates that are being paid on regular savings accounts.

So there really isn't any advantage for a Borrower to put their money in a bank account, and pay their taxes every six months and homeowner insurance once a year.  Also, why would anyone want to take the chance of not having saved enough money to pay the huge tax bill that comes every six month, or once a year like six town here in Connecticut do.  I for one would much rather have it included in my mortgage payment every month, and know for sure that the money will be there when these bills come due.  That is my opinion, because I have never been a fan of having to write out a check for thousands of dollars to the tax collector every six months.  It is painful enough to have to do it for my cars, and that bill is much less.

 

Previous FAQ's Blogs.

"What Do I Need To Do To Get Pre-Qualified For A Mortgage?"

"What Do You Mean I Need Money For Closing Costs?"

"Why Do I have To Pay For A Full Year Of Homeowners Insurance Up Font When I Am Paying For It Every Month In My Mortgage Payment?"

"How Can I improve My Credit Scores?"

"PMI/MI Why Do I Have To Pay It?"

"At What Point Can I Get Rid Of The PMI Or MI?"

"I Don't Want To Pay Any Points?"

 

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  Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

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George Souto
NMLS# 65149

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I am a Mortgage Loan Officer who can assist you with all your mortgage & refinancing needs in
CT, and RI

I can assist you with your Conventional,
FHA, CHFA, VA, USDA, & 203K loan programs.

I reside in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Haddam. E. Haddam, Higganum, Chester, Essex, Deep River.

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Comments(7)

Emily Medvec
eXp Realty LLC - Santa Fe, NM
Broker | Realtor | Serving Santa Fe & Northern NM

George, your series continues to be a first rate important FAQ for the real world of mortgage financing today. You pro and con approach to this one makes it clear there escrow is a wise option! Suggested!

May 23, 2012 11:57 AM
Brenda Mullen
RE/MAX Associates - San Antonio, TX
Your San Antonio TX Real Estate Agent!!

Escrow is really the best way to get your taxes paid every month.  Property taxes here in San Antonio TX run pretty high, so borrowers would have to have the discipline to save at a lot of money every month to ensure those taxes and insurance are paid..if they don't possess that discipline, could be ugly :).  

May 23, 2012 12:01 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

I guess when interest rates were higher one could argue, they could invest the funds in something that would bring them a higher rate of return and they would pay the taxes and insurance when due.  However, today, this is not a reason.  At any rate, I can see the lenders point of view.

May 23, 2012 12:39 PM
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Nice job explaining this commonly asked question. For the most part, will recommend that not matter how much someone puts down or has in equity on a conventional loan, that they escrow, but when they object, they normally do for a reason.

May 23, 2012 07:26 PM
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

George I am going to have to disagree with you on this one. Do you know how many people have problems with their escrow accounts? Maybe it hasn't been a problem where you are but I know numerous people that have had issues with their lender and escrow accounts. Additionally if you are like me and you pay over 14k a year on taxes for your home and it is collected quarterly why would you want to give it to the bank monthly? You are assuming that everyone is just holding that money in a bank account making next to nothing on their money. I would never want the lender to escrow my funds. I can see your point for a borderline borrower who does not mangage their money well but not for someone who does not have any financial issues.

May 23, 2012 10:02 PM
Al & Peggy Cunningham, Brokers
RE/MAX West Realty Inc., Brokerage - Brampton, ON
Our Family Wants To Help Your Family!

Up here in Canada land we have the option of either George. The only problem we see with the banks (here anyway) taking the taxes of front is they always want to take more funds to ensure they have enough funds when the tax bill arrives. So the bank is always caring a credit in the tax account. 

May 23, 2012 10:08 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Emily, thank you.

Brenda, I see it as the safe thing to do.  I I don't want to be looking at a big tax bill every six months.

Joan, for a short time it might of been a more valid point, but I was looking at what banks are offering on CD's and it is pretty low.

Joe, the recent reason that I have been getting is that they want to keep their monthly payment down because they are concerned about the higher monthly figure with the taxes. This really concerns me, because if they are going to have a hard time making the monthly payment with the taxes, how are they going to come up with the taxes money when it is do.

Bill there is always an exception to the rule, and I do know of one bank that would fall into the description that you gave about management of escrow accounts, but they are not the norm.  I do a fair number of loans, and rarely are people in the position that you are in.  Most are under the assumption that the money is earning nothing in escrow, and if they do not escrow they don't have a system in place to have the money every six months (that is the way that a 162 out of 169 towns here in Connecticut collect taxes).  Most tell me that they will pay the taxes with their income tax return.  Some how that does not seem like a very solid plan to me :)

Al & Peggy the is a good reason for making sure there is a cushion in the escrow account.  I have nothing to do with that end of the business, but I get the phone calls when a Borrower gets the notice that their escrow account is short.  They are not happy and the words they use to describe their unhappiness are not pleasant :)

 

May 23, 2012 10:44 PM