An escrow account is an agreement with your mortgage lender to guarantee payment of your property tax bill, home insurance, and, if necessary, private mortgage insurance (PMI). Even if the lender waives or cancels the escrow requirement, it may require you to provide proof that you have made your tax and insurance payments. To find out if you are eligible to delete the account, contact the managing entity.
Mortgage lenders use escrow accounts to ensure that their borrowers' property taxes and home insurance premiums are paid on time. If you're granted an escrow exemption, instead of including your taxes and insurance as part of your monthly mortgage payment, you'll be responsible for paying each of your bills in a single lump sum as they come due. The annual and monthly costs of your escrow account will be estimated during the mortgage application process and will be finalized upon closing. Once your escrow is paid off, you'll need to budget accordingly to pay for taxes and insurance when they're due.
If you prefer to be in control of your property taxes and insurance payments, or if you have fluctuating incomes and need flexibility, it might make sense to apply for an escrow exemption. The lender must send you a statement within 45 days of the establishment of the escrow account detailing the estimated taxes, premiums, and other costs, such as the PMI, for the next year. Some borrowers like the ease of having an escrow account; by paying a little each month, they can avoid worrying about having to pay large amounts when taxes or insurance bills are due. Your lender will open a home equity account at closing when you pay part of the escrow in advance.
If you have an escrow account, your annual insurance premium and property tax bill will be distributed into 12 equal payments and will be included in your monthly mortgage payment, in addition to the principal and interest you pay on the mortgage itself. Some borrowers prefer to be able to keep the money they're depositing in their escrow account and instead deposit it in their own interest-bearing account, where they can accumulate cash until they have to pay their bills. Not only will this allow you to eliminate your escrow account (although you should check with your conventional lender to make sure they offer this option), but you also won't have to pay the FHA mortgage insurance premium.
While an escrow account can make it easier to save for your taxes and insurance, some homeowners would prefer to make these payments themselves. Home equity accounts should not be confused with the term escrow used during the home buying process.