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It has been a year since posting this question: Mortgage sold to yet another servicer. What are my options?, and I am happy to report that I have not had any problems with this new servicer. However, following the advice in the answers/comments, I still requested that I pay my own escrow. (I had to wait a year into the loan to build up credit/trust before I was allowed to request the removal.)

However, now they are trying to charge me a fee of $850 to process the request. According to the letter, I must:

Pay a one-time escrow removal fee of $850.00, which represents .25% of your original loan amount, and it covers our costs in monitoring non-escrow loans' tax and/or insurance payments for the term of the loan.

My questions are:

  1. Is this fee normal/fair?
  2. Does it make financial sense to follow through? As in, will I make this money back in interest over the span of 29 years?

Regarding the second question, my taxes/insurance is ~$6000 per year, all bills paid semi-annually. According to my simple math (($3000*0.5%)*58 payments) = $870, meaning as long as I make a half a percent in interest on my money, it would be even. Obviously this math does not represent cumulative interest, but I don't believe it should since I will be losing the principal avery 6 months. There would be some accumulation here, but I have neglected it.

I will also have to provide documentation to them after each payment I make to prove I am paying, which might be more of a headache than it's worth, but that's a separate issue.

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Assume they do not overwithhold. You pay in $500/mo, and every time it hits $3000, they pay the tax. Engineers call this a sawtooth function, it looks like this.

enter image description here

The average balance is not $3000, but close to $1500. The very simple math is $1500 * rate * years.

It looks like your equation except it's not 58, it's just the years. And the question is whether you can make more than $850 on $1500 average before you sell. I wouldn't be so quick to plug in 29 years, as the average home ownership is 7 years, and depending, who knows if a refinance is in your future?

The bottom line - How long would it take you to get a 57% return (2350/1500)? Ironically, the most responsible (and risk averse) person would say "decades. Banks offer less than 1%." even an 8% market return, while not guaranteed, is close to 7 years. But, if you carry 18% credit card debt, you can pay it down a bit each month and let it float back up every 6 months. Less than 4 years to break even.

  • Thanks for the answer. Wouldn't it be $500 a month until it gets to $3000 , since it's paid semi-annually? – dberm22 Sep 18 '16 at 13:09
  • Edited. I had a brain cramp. Should be good now. – JoeTaxpayer Sep 18 '16 at 13:12
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Consider that the bank of course makes money on the money in your escrow. It is nothing but a free loan you give the bank, and the official reasons why they want it are mostly BS - they want your free loan, nothing else.

As a consequence, to let you out of it, they want the money they now cannot make on your money upfront, in form of a 'fee'. That explains the amount; it is right their expected loss by letting you out.

Unfortunately, knowing this doesn't change your options. Either way, you will have to pay that money; either as a one-time fee, or as a continuing loss of interest.
As others mentioned, you cannot calculate with 29 years, as chances are the mortgage will end earlier - by refinancing or sale. Then you are back to square one with another mandatory escrow; so paying the fee is probably not a good idea.

If you are an interesting borrower for other banks, you might be able to refinance with no escrow; you can always try to negotiate this and make it a part of the contract. If they want your business, they might agree to that.

  • I don't think banks do this because they want to greedily keep the <1% interest for themselves. Rather, they want to avoid the risk of homeowners not paying their taxes and insurance properly. In the former case, the government can seize the property, and in the latter, a fire could burn it down. Either way the bank loses the collateral for the loan. Higher risk = higher costs. – stannius Sep 20 '16 at 18:00
  • Maybe, but they have other ways to ensure that. I'd be willing to prove to them each year that I paid in time, rather then giving them 13/12 of the amount upfront (yes, by law they can overfill the escrow by 1/12, and of course they do that, to the last cent legally allowed, even if I show proof that the tax is lower than last year). I am not convinced that that security is the only driving force behind their behavior. – Aganju Sep 20 '16 at 21:45

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