Remember the initial escrow payment, the 2-months you deposit at closing? The lender calls it a cushion. It’s extra money that the lender holds in reserve. If your insurance or taxes increase, the lender would use the cushion to pay for it, and then increase the escrow portion of your monthly payments.
On the other hand, if by some miracle your insurance or taxes decrease, the lender would lower your escrow and your total monthly payment would decrease. Since lenders may not hold more than a 2-month cushion, you could get an escrow refund check.
As you shop for a mortgage, the prepaid items will be different on the Loan Estimates you get from competing lenders. In other words, the dollar amounts in sections F G won’t match up. One lender’s estimate for homeowner’s insurance, prepaid interest, or property taxes could be much higher or lower than other estimates.
Don’t pick one lender over another just because their prepaid items are less. How much you actually prepay for insurance and taxes will end up the same no matter which lender you choose.
Lenders won’t know the insurance or tax amounts right after you apply for a mortgage. They give you approximate numbers using the information available at the time. After you select an insurance company and the seller provides the county property tax records, the lender verifies the exact amounts and sends you a revised Loan Estimate.
If you want the exact numbers now, get a quote from an insurance company. Ask your real estate agent for tax info or search the county treasurer’s website.
- Cook County
- DuPage County
- Lake County
- Will County
When to Waive Escrow
Lenders require escrow accounts for government loans, like FHA, VA, or USDA mortgages. So forget about waiving the escrow if your loan is insured or backed by our government.
But you could ask the lender to waive the escrow for a conventional loan if your down payment is 20% or more and you can handle the lump sum payments for the annual homeowner’s insurance and property tax installments.
For instance, if you buy a place for $350,000 you could waive the escrow and manage the insurance and tax payments on your own as long as the Loan Type is Conventional and your down payment is at least $70,000, 20% of the purchase price in this case.
Lenders want to manage your insurance and tax payments through an escrow account. That’s because uninsured homes and delinquent property taxes increase the risk of loss from disaster and foreclosure.
The lender might charge you a fee to waive the escrow. The fee is typically 0.25% of the loan amount. So if your loan amount is $280,000, the lender might charge you a $700 fee at closing to waive the escrow.
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Conclusion
Prepaid items are the homeowner’s insurance, mortgage interest, and property taxes that you pay when you buy a home. These costs increase the amount of money you need at closing. To see how much, look at Page 2 of the Loan Estimate, the Prepaids and the Initial Escrow Payment at Closing sections.