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I notice on a mortgage payment that a portion of every payment goes towards an escrow account (which goes towards homeowner insurance and property taxes). In the meantime, there seems to be a significant amount of money sitting in the escrow account that doesn't reduce payments or earn interest (that I know of).

Is there a better way to handle the money going into the mortgage escrow account?

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6 Answers

In many states banks are required to pay interest on your escrow according to this article. I know i am getting interest paid. Once your mortgage is setup with an escrow there is no way to get rid of it (only to refinance). Also nowadays many banks require you to escrow taxes and insurance. It's their way to make sure you don't default on your taxes and don't cancel insurance on "their" property.

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My mortgage started out with an escrow, but it seemed like they were mismanaging it. They often over-collected it and locked up my money unnecessarily or under-collected and had to catch up later to pay the tax bill.

Despite what Vitalik said, I told them I would pay my own taxes and insurance and to stop the escrow and they did without argument. Keep in mind, you should only do this if you are good about saving money. The banks know that many people aren't and will have trouble at the end of the year when a multi-thousand dollar tax or insurance bill comes due, hence the reason they try to get you to do the escrow.

In my case, I just had the estimated tax/escrow amount automatically deposited from my paycheck into a special interest bearing savings account that I manage.

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lucky you. i prefer to pay taxes and insurance myself too. Just makes it easier if i want to switch an insurance company. But when i asked the mortgage company said "it's impossible". I wonder if anybody else was able to cancel escrow. Maybe as JoeTaxpayer said it depends on how much of the loan is paid off. –  Vitalik Oct 11 '10 at 19:10
    
@Vitalik - In case it is relevant, I had paid down my loan quite a bit by the time I asked them to do this. So it is possible that is why they let me do it. –  JohnFx Oct 11 '10 at 19:25
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My bank did fine the first couple years of handling my escrow, then out of the blue, totally messed it up and cost me a lot of time straightening it all out with them as well as straightening out with my taxing authority. I told them to send me the balance of the escrow and cancel it, that I would handle it from then on and they did. There was a qualification that I met, I just can't remember what that was. I too have a lot of equity and was never late on a payment. I also manage it via direct deposit from my paychecks into interest bearing accounts.

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+1 @Linda - Welcome to Money Stack Exchange. Excellent on topic answer. –  mpenrow May 18 '11 at 16:44
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The terms of most mortgages usually include the requirement for tax escrow. Some banks will let you handle your own taxes once you loan to value drops below 50%. It's annoying that you lose the use of your own funds, I agree. It can't hurt to write a note to the bank and see it they'll waive escrow.

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I simply wrote my bank an email and said, "I want to handle my own escrow".

They said, "fine" and even let me set up a third account called "escrow" (savings and checking being the other two) that I just transfer money into whenever I want.

But, I don't actually know what their requirements are for doing that. I have a ton of equity in the house, and I never missed a payment, AND I have direct deposit at that institution.

So, it can be done.

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The escrow rules used to be A LOT more lax. The banks used to screw people pretty hard. For example - after paying off a loan banks would drag their feet about sending back the money. This does not account for much on one loan, but if you multiply that by all the loans they service it is a significant amount.

There are not strict rules governing the amount of money that can be held in escrow and how quickly the money has to be returned after a loan payoff.

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