How Do I Get Rid of My Mortgage Escrow?

April 19, 1999

"We have a perfect payment record and our loan is now about 50% of property value. The mortgage servicer keeps making errors in our escrow account and they won't pay us any interest on the balance. They have told us that we can take over responsibility for paying our own taxes and insurance when the loan amount is down to 20% of value, and then we must pay them $150…Can they do this?"

I'm afraid they can. When you took out your loan, you agreed contractually to escrow your taxes and insurance with the lender. There is no provision in the contract for terminating the arrangement. Hence, you are stuck with it unless the lender agrees to change it.

Some states have passed legislation requiring the payment of interest on escrow accounts, but your state is not one of them. There are also HUD rules that prevent the lender from requiring a larger escrow than is actually needed. But to my knowledge, there are no rules dictating the elimination of the escrows if certain conditions are met. What you must do, therefore, is to convince the lender that it is his interest to eliminate the requirement in your case.

If the lender is a depository institution servicing its own mortgages, your best shot is to appeal as a customer of the firm. If it isn't too costly, depositories usually want to satisfy their customers or potential customers. Increasingly, however, loans are being serviced not by lenders but by servicing agents working for lenders. The self-interest of servicing agents is a different matter.

Servicing agents make most of their money from the servicing fees paid by the lender, and from the interest earnings on escrow accounts. When a loan they are servicing is refinanced, however, the income on this loan ceases unless the agent is the one making the new loan. If the servicing agent understands that if you cannot terminate your escrow account, you intend to refinance your mortgage with another lender (not with him), you will get his attention. After all, it is better to lose only the escrow interest than to lose both the escrow interest and the servicing fee.

But your stated intentions must be credible. The best way to make them credible is to go through the refinance motions. Call to get your most recent loan balance, which will in all probability trigger a preemptive response. Balance inquiries usually mean a refinance is planned, and astute servicing agents move quickly to assure that they get first crack at the new loan. This is the occasion to let them know that you just might be willing to stay put if they terminate the escrow.

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