Q: I am currently escrowing my property taxes with the lender. But would like to close the escrow account and manage the taxes myself.
I would like to know whether there are any restrictions that would prevent me from closing the account.
When I called the lender, the person who answered the call said I should have only 75 percent of the loan balance remaining in order to qualify to close the escrow account.
A: The first thing you need to understand about mortgage lenders and property taxes is that the lender wants to make sure that real estate taxes are always paid.
If the real estate tax bill for your home isn’t paid, the house could be sold to someone who agreed to pay the taxes owed and you and the lender could be left out in the cold. You could lose your home and the lender could lose its interest in the home.
In almost all residential loan closings, the lender has the right to demand a real estate tax escrow. With money in hand, the lender can pay the real estate taxes as they come due.
In some circumstances, however, lenders will waive the requirement of a tax escrow. In Illinois they will waive this requirement if you pledge an account with more than enough money to pay the real estate taxes for one year – just in case you fail to pay them on your own.
In other words, you have to put cash into a special account which you can’t touch and also pay the taxes. However, any interest earned on the account would go to you.
Once you set up a tax escrow with the lender, Illinois law allows you to pay your own taxes once you have paid down the original loan amount by 25 percent.
Other states have other rules but in essence the rules are a balancing act. They balance the need of the lender to know that funds are available to pay the real estate taxes and the desire of borrowers to control their own money.
Since you live in Illinois, it appears you were given correct information. But for other borrowers, in other states, whether you can cancel the escrow account depends on how much of your original loan amount is left to be paid, how long you have been with the lender, and what is your current property value. But just so you know, some lenders will waive these requirements if you ask.
If your property was worth $200,000 when you bought it, your original loan was 80 percent of the sales price, and you have had the loan for five years, your lender may waive their escrow-closing requirement just to keep you happy.
The lender may decide that its risk is low. Certainly, the smaller your loan, the more you have paid off and the longer you have had the loan, the better your chances will be of having the escrow canceled. But there is no guaranty that the lender will allow it.
For more information, ask your lender to provide you with its written rules on canceling a tax escrow.
Published: May 15, 2006