Why I Cancelled My Escrow Account

So why in the world would I cancel my escrow account? Two main reasons: (1) to save money and (2) to make money. Before I get into all of the details though, let’s first explore exactly what an escrow account is. An escrow account is set up by the bank when they approve your mortgage. Its main purpose is to help you pay for your property taxes and home insurance. You may not realize it, but a portion of your monthly mortgage payment funds this account. In my case, my total mortgage payment was $714 per month and was broken up like this:

      • $320 – Principle
      • $196 – Interest
      • $198 – Property tax and insurance

Escrow accounts can be good for individuals that have a hard time holding onto their money (because property taxes are often $2,000 or more per year), but if you have no trouble keeping your savings account stocked then you might want to consider doing what I did and cancel your escrow account.

5 Reasons Why I Cancelled My Escrow Account

I didn’t just cancel my escrow account on a whim – I have been thinking about it for some time now, and I finally pulled the trigger a couple of days ago. Here are my reasons for doing such a radical thing:

no escrow1) There is a cushion built into the account that you will never use or be able to access

My typical escrow payment used to be $190 a month, but since the fund went below $400 a few months ago they upped my payment to $198. Basically, the bank wants to be absolutely certain that there is enough money in the escrow fund to cover the taxes and insurance. And, in order to be certain they need to have a bit of a buffer in the account. I get it, but I still don’t like having an extra $500 in an account that I can never touch. I would much rather have that money in my account.

2) Easily move my home insurance to another company

I have been getting price quotes from many different insurance companies lately to see if I can reduce my premiums on my car and home insurance. But, since my home insurance is being paid for by my escrow company I would need to communicate with them to ensure that they have the proper insurance information to make the next payment. This is way too much of a hassle. If I want to change insurance companies, I don’t want to have to deal with a third party and waste an additional hour of my life on the phone.

3) Use my money the way I want toΒ 

Not only is there a buffer amount in my escrow account, but for 11 months out of the year my money is just sitting there doing nothing – and it’s often $1,000 or more! Once that money is in my account, I simply can’t get it out. I equate this to paying taxes. If we pay too much money to the government throughout the year, we are essentially giving them an interest free loan for the year. The same is true for my escrow account. By cancelling this account, I can be certain that I am not giving out an interest free loan.

4) Put it into my checking account for 3% interest.

Since I cancelled my account, the remaining balance is being sent to me in the form of a check. This additional $1,400 will beef up my account nicely. And, by putting it into my checking account I will be earning 3% interest on that money (I certainly wouldn’t have earned any money in my escrow account). Over the next 6 months I will earn more than $23 just by parking these funds into my checking account!

5) Pay with the credit card for points

When it comes time for me to pay the property taxes, instead of using my debit card I can put it on my credit card to earn some additional rewards points (which I will of course pay off immediately with my savings). With taxes of nearly $2,000, I will earn an easy $20 this way.

So as a recap, I now have less hassle and I will earn an extra $40 a year. That’s a win-win for me!

Requirements For Cancelling Your Escrow

Of course, not everyone can just up and cancel their escrow account. The bank wants to be sure you are in good standing and that you will likely pay the bills when that time comes. For that reason, there are a few common requirements for cancelling that escrow account.

  1. Have at least 20% equity in your home (and are no longer paying PMI)
  2. Mortgage at least 1 year old
  3. Mortgage has to be a conventional loan
  4. Cannot cancel the account if your tax or insurace bill is coming in the next 30 days

So what do you think? Will you be cancelling your escrow account as well? Or have you already?

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11 comments to Why I Cancelled My Escrow Account

  • Renee

    We do not have an escrow account. Are you sure about #5? Here in CA, if I use a credit card to pay my property taxes, there is a processing fee, which exceeds the rewards I would get.

    • This is what I was told, but I have not yet looked into any processing fees. I suppose I will find out when July rolls around. In the meantime though, I will enjoy having my $1,500 in the bank collecting interest! πŸ˜‰

  • On the plus side, you’re far past having to pay PMI! πŸ™‚
    Chris recently posted..Unemployment extension suggestion

  • We canceled our escrow on our last house and our current house. The banks seem to have such a hard time figuring out the math for how much to set aside each month. Plus that cushion you mentioned is pretty large. We have been very happy saving up our own escrow. Good work Derek!
    Matt @ Financial Excellence recently posted..Stop Failing at New Year’s Resolutions: Set Goals Instead

    • They really do have a hard time figuring out how much needs to be in the account. You think they’d be better at it since they do work with money for a living… Anyway, I’m with you. I’m going to be very happy paying these bills myself.

  • Our escrow went up last year as well. I had no idea you could cancel it, because when refinanced, there was a $400 fee if you didn’t sign up for escrow. I wonder if we can cancel now without the fee? I’d much rather pay things myself. I know we can at least get CC points for the insurance, but I’m not sure about the property tax. Where did you find a checking account with 3% interest?
    Kim@Eyesonthedollar recently posted..Automatic Savings: The Key to Stress Free Finances

    • If you have more than 25% equity, there is a pretty good chance you could cancel it. Give your bank a call and find out! There is nothing to lose! Oh, and the 3% checking account is from my credit union (credit unions offer a far better checking account interest rate than regular banks). They pay 3% on up to $15,000 in your account. With a full account, you could earn an additional $450 a year. πŸ™‚

  • I seem to get a letter each year telling me they need to adjust how much needs to go into my escrow account – usually needs to be altered upward. Most of the times it makes sense as my taxes go up, but sometimes my escrow payment needs to increase even though my taxes didn’t go up. When we refinances earlier this month, we had to put a couple of hundred extra in because it was behind. How can it be that hard to get it right? That being said…I like not having to remember to send in my property taxes and home owners insurance.
    Travis @debtchronicles recently posted..What Does It Mean To Get Our Finances Back On Track?

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