have an account?【sign in】Can You Cancel Mortgage Escrow Account? Understanding Your Options and Risks
khalilauthorMortgage escrow accounts are a common feature of residential mortgage loans. They are used to ensure that both the borrower and the lender have an equitable share of the principal and interest due on the loan. The escrow account holds a portion of the monthly principal and interest payment, which is applied towards the principal balance of the loan. In some cases, however, borrowers may wonder if they can cancel their mortgage escrow account. In this article, we will explore the options and risks associated with canceling an escrow account, as well as the steps to take if you decide to do so.
Understanding Escrow Accounts
Escrow accounts are established when a borrower takes out a loan to purchase or refinance a home. The lender requires borrowers to set aside a portion of their monthly mortgage payment into an escrow account. This money is used to pay down the principal balance of the loan and to cover real estate taxes, insurance, and other necessary expenses associated with the property.
The amount held in escrow varies based on the loan terms and the borrower's individual circumstances. Typically, between 1% and 2% of the monthly principal and interest payment is set aside for escrow purposes. This money is held in an escrow account until it is sufficient to pay the taxes, insurance, and other necessary expenses associated with the property.
Canceling an Escrow Account: Options and Risks
There are several options available to borrowers who wish to cancel their mortgage escrow account. However, doing so comes with certain risks that should be considered.
1. Request a Loan Modification
One option for canceling an escrow account is to request a loan modification. This involves asking the lender to adjust the terms of the loan, such as lowering the interest rate, reducing the principal balance, or converting the escrow account to a flat rate payment. While this option may be beneficial in reducing monthly mortgage payments, it comes with its own set of risks and challenges. It is essential to work with a qualified loan modification professional to ensure a successful process.
2. Convert to a Flat Rate Payment
Another option for canceling an escrow account is to request that the lender convert the escrow account to a flat rate payment. In this situation, the borrower would no longer have an escrow account, and the monthly payment would be based on the principal balance of the loan, excluding taxes and insurance. This option may be more beneficial for borrowers with stable income and no significant tax or insurance obligations associated with the property. However, it is essential to understand the potential impact on the loan balance and future mortgage payments.
3. Consider Selling the Home
For some borrowers, selling the home may be an option to cancel the mortgage escrow account. In this situation, the new buyer would be responsible for paying taxes, insurance, and any other necessary expenses associated with the property. This option requires a successful sale of the home, which can be challenging in today's real estate market. It is essential to work with a real estate professional to ensure a successful transaction.
Canceling an mortgage escrow account is not an easy decision and should only be considered after carefully weighing the options and risks associated with this process. Working with a qualified financial professional can help you understand the implications of canceling your escrow account and find the best solution for your individual circumstances. Remember that canceling an escrow account may have negative consequences on your credit score and future mortgage applications, so be sure to carefully consider all of your options.