How to Avoid Escrow on Mortgages

Escrow accounts are generally used to hold money which needs to be distributed or disbursed, in order to make sure that it is. If you purchase a house, you will need to pay taxes and insurance, which are often included in the monthly mortgage payments. However, this also means that your monthly mortgage rate will fluctuate when the tax and insurance rates rise.

If you finance your property purchase with a mortgage loan, the lender will most likely need you to escrow for ‘T&I’ – taxes and insurance. However, you can work out an arrangement with your lender and pay the taxes and insurance yourself, avoiding the need for escrow on your mortgage.

However, before you seek an arrangement to avoid escrow, be prepared to make lump sum payments. Your taxation authority and your insurer are not likely to accept monthly installments and you should have enough finances to cover the payments without having to escrow them.

You can begin by consulting your lender or your bank’s loan officer and finding out whether escrow can be avoided. If the lender agrees to it, you will need to find out the terms of such an agreement. Generally, a higher percentage in down payment and proof of financial security (usually enough to cover around a year of taxes and insurance payments) are necessary to get a mortgage without escrow.

Next you will need to get your financial statements for your bank or brokerage accounts to prove that you have sufficient assets to cover your tax and insurance payments without having to escrow them. However, make sure the account statements you produce are in your own name.

If you have been handling your own tax and insurance payments in the past, you should produce the records for your lender, in order to convince him/her that you are able to manage your payments without the need for escrowing them.

While earlier lenders were willing to offer 100% mortgages, buyers are now required to put down an initial payment before the lender covers the remaining finances. Typically people make 10% down payments, but if you want to avoid escrow, you should put down around 20%.

After you get approval for handling your own tax and insurance payments, you won’t need to escrow them. However, you will have to contact your local taxation authority for details on taxes and the insurer covering your home insurance.