Disadvantages of no Escrow Account

[The Ponzzz]

Looking to the PC for their opinion. Recently, the bank that handles my mortgage tossed us a curve ball about my escrow account that had us scrambling. After some research and speaking with several people at our county tax office, we discovered that our bank isn't being very truthful and are trying to "bank" on our ignorance. They are basically claiming there is a shortage in our escrow account that is three times the value of our taxes, on top of saying our taxes went up, when in fact, they went down.

So... We're in the process of trying to get a new lender, but in the mean time, I want to stop the escrow account completely. There is a small fee to do so, but we have that ability to do it. I've done a lot of reading, and I can't see a reason not to do this. But I was curious if any other home owners out there can think of some true disadvantages of not having an escrow account.

Just to make it perfectly clear, we have absolutely no problem with paying our taxes in full, once a year when they are due. And our insurance company is local and down the road, so we can hand deliver our yearly homeowner's insurance.

[Bhuryn]

There's really no advantage to use a escrow account if you can make your payments and your lender allows it. I'm not sure, but I think some lenders require you to have an escrow account (usually first time home buyers). Gan probably knows more =P.

[The Ponzzz]

Yeah, we can close the escrow account for a small fee. Currently it feels like they are stealing from us.

[diethx]

http://static.pyzam.com/img/funnypics/misc/opinion.jpg

[gorea6]

http://static.pyzam.com/img/funnypics/misc/opinion.jpg

lmao

[The Ponzzz]

Bump! I know we got some home owners here on the PC.

[Bhuryn]

Bump! I know we got some home owners here on the PC.

Just PM Gan and ask him. I'm buying my second house next week and I can't tell ya anymore then I already did =).

[Gan]

Just saw the thread.

Pay the fee and close your account. I'm seeing more and more examples of incompetent escrow account management by lenders. There is no regulation on account management other than that the money still belongs to you, just not the interest it gains (as identified in your closing paperwork on the escrow account disclosure).

With a normal lender, you can take your tax statements and request the escrow account department should adjust the balance requirements to match your anticipated taxes due plus a 'cushion'. How this cushion amount is determined by your lender (which sucks).

My advice is set up your own escrow account, deposit/transfer your annualized tax/insurance (if you escrow for insurance) amount each month into your seperate account and earn the interest yourself. Then you can pay taxes/insurance out when its due. You're compensated for management of that account by the interest you earn. Just make sure you have the discipline not to dip into it.

Edited to note that you are fortunate enough to have a 'voluntary' escrow account arrangement with your lender. Some loans require a mandatory escrow account setup to mitigate risk, especially on loans over 80% LTV. The FTC has guidelines that require lenders to release the obligation of mandatory escrows once the borrower drops below 80% unless the borrower has demonstrated that they are a default risk (ie. missed payments, delinquent taxes, etc.).

[The Ponzzz]

Yeah, I put down 22% when we bought the house to avoid PMI, and thankfully, it allows us to drop the escrow. Never been late, as we set up automatic payments the day we closed. Thanks for the advice, Gan. We'll be closing it Monday.

[Gan]

Glad to help. :)

[Bhuryn]

Man, I should check, we put down 20% on our new house.

[Gan]

Man, I should check, we put down 20% on our new house.

Somewhere in your closing packet is an escrow account disclosure that will denote whether your escrow account is mandatory or voluntary.

If you have a good payment history and own over 20% equity then you should be free to cancel.

[Mikalmas]

I have a question about this myself. I bought my house (first time home buyer) almost 5 years ago now. I didn't; have 20% down, so I'm paying PMI, of course. My question is this, how does the lender determine "20% equity"? Does that mean once 20% of the original loan amount is paid? Or does it mean, considering appreciation, the total amount owed on the loan is 80% of the "appraised value"? If its the latter, what determines the appraised value? The tax appraisal? Or something else altogether? I certainly don't want to have to pay PMI any longer than I absolutely have to.

[The Ponzzz]

It is the original loan amount in order to have equity.

We took a few classes on buying a home and we discovered that buying a home for 150k without 20% down, we would have to pay $75 a month to PMI for roughly 10 years (if we paid only our mortgage amount and not a dime more). It was estimated it would be 10k going to PMI for the house we ended up buying, that is just gone to the wind money. So we saved a bit over 30k before we bought the house.

[Gan]

I have a question about this myself. I bought my house (first time home buyer) almost 5 years ago now. I didn't; have 20% down, so I'm paying PMI, of course. My question is this, how does the lender determine "20% equity"? Does that mean once 20% of the original loan amount is paid? Or does it mean, considering appreciation, the total amount owed on the loan is 80% of the "appraised value"? If its the latter, what determines the appraised value? The tax appraisal? Or something else altogether? I certainly don't want to have to pay PMI any longer than I absolutely have to.

The lender determines equity based on principal balance of loan to original loan amount. You can petition the lender to review a new market appraisal (your cost to have done) if you feel your property has appraised in value and therefore increased your equity stake in ownership. Just be aware that lenders are really leery of market equity appraisals that they do not initiate themselves and they may not accept your petition.

The law regarding PMI and equity is based off of original loan value as per the guidelines of the FTC.

Some helpful information:

http://www.hud.gov/offices/hsg/sfh/res/respapmi.cfm

http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt072.pdf