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An Escrow Waiver Can Save You Money!

Normally, your monthly mortgage payment will include an amount that will be credited to your escrow account. The monthly escrow payment amount should be 1/12th of the total amount expected to be paid out during the year for real estate taxes and hazard insurance plus a two month cushion for unexpected increases. Real estate taxes are usually paid in December and hazard insurance is paid on the anniversary date of the policy.

The following example shows the escrow account of John & Mary, who borrowed $100,000 at 7% for 30 years to buy their new home. Their monthly payment of $956.96 includes a $291.66 escrow payment.

With the lender’s agreement to “waive escrows”, John & Mary could have reduced their total monthly payment from $956.96 to $665.30. They would be responsible for paying the $1,000 for hazard insurance in November and the $2,499.96 of taxes in December, but they could use the average balance of $2,104.14 that would have been held by the lender to earn interest in a savings account or to reduce interest expense by paying down other debt. As shown below, over a 30 year period, depending on how John and Mary use the funds, the savings could be meaningful:

If you request and are granted an “escrow waiver”, the lender will normally collect a fee equal to 1/4% of the loan amount at closing, which in John & Mary’s case would have been $250. That fee is a very meager price to pay for the potential savings that can be realized.

Having “escrows waived” is not the right choice for everyone, but for those who qualify (borrowers with an acceptable credit record who make at least a 20% down payment), significant savings can be achieved.