Trimming the Escrow

QUESTION:

Our lender has sent us a note – a good one, surprisingly! They say our escrow account is too big, so they’re reducing our monthly mortgage payment plus they sent us a check for $165. How is this possible?

ANSWER:

If you purchased with less than 20 percent down you are required to put money into an “escrow” or trust account maintained by the lender. Part of your monthly payment goes to the escrow account, and that money is used to cover your property taxes and mortgage insurance costs.

Escrow payments are adjusted annually, and generally a lender can maintain an account with a balance that equals as much as 14 monthly payments at some point during the year. Because property taxes and insurance costs have gone down in most markets as a result of declining home values, it follows that the lender should be collecting less for escrow. In this case the lender made an adjustment and sent a check for the overage, steps that were both proper and appropriate.

Two points on this, though:

First, imagine that property values in your market once again rise. You should then expect property taxes and insurance costs to increase, and as a result you will receive a letter from your lender requiring either higher monthly payments for the coming year or a lump-sum payment to cover the new cost.

Second, the money held in borrower escrow accounts produces no interest for homeowners. If you buy with less than 20 percent down you may want to consider directly paying your property taxes and insurance. This sounds attractive in theory, but you’re likely better off with monthly payments to the lender despite the lack of interest. Why? Property taxes and insurance bills together can easily total thousands of dollars. Unpaid property taxes can lead to foreclosure even if you are current on the mortgage – and unpaid insurance bills are a violation of the mortgage agreement and potentially another cause of foreclosure.