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Mortgage escrow is an account that your mortgage company maintains to pay taxes and insurance on the property. These accounts are built into the monthly mortgage payments that a homeowner makes. Most lenders require that escrow accounts be built into the loan to ensure that taxes and insurance are paid on time. An escrow account can be beneficial to the property owner since the payments are made by the bank on your behalf and it reduces the chance of your falling behind on payments. However, as a homeowner, you do have a choice as to whether you want to opt out of the bank having a mortgage escrow account.
If you want to opt out of the mortgage escrow, you will need to review the following documents: mortgage loan, annual escrow account statement and an appraised value of the property. These three documents will help you to determine what your current loan-to-value ratio is. The loan-to-value ratio is what lenders use to determine if the mortgage escrow is required. Generally, if the ratio is over 80 percent, an escrow is needed. If you find that your loan-to-value ratio no longer falls within the industry standards, you will need to contact your mortgage company to determine if the escrow can be removed.
Prior to granting you the chance to opt out, the mortgage company has certain requirements that must be completed. The loan-to-value ratio must be less than 80 percent. In addition, the taxes and property need to be paid in advance for a year, and any balances on the escrow account must be paid in full. Some companies charge a fee to remove the escrow account. These are just some of the requirements necessary to grant the request of opting out. Check with your lender to determine if there are any additional requirements you need to fulfill. If you have fulfilled the requirements, you will need to make a request in writing to your mortgage company to remove the escrow account.
Create Your Own Escrow
Now that you have removed the mortgage escrow from your loan, you will still need to develop a financial plan to stay on top of your taxes and insurance. To set up your own escrow account, you should contact your bank. Most banks will set up an interest-bearing savings account for you. To determine how much you need to save monthly, divide your yearly tax amount by 12. The number should provide you with a minimum monthly amount that has to be put away to meet your tax and insurance obligations. If you are able to, you may add additional money to the account to ensure that you are able to cover the amount due. Another option available is paying your taxes and insurance with a credit card. Some cities allow credit card payments (some may charge a service fee). Using a credit card can reduce the amount you have to save. With either option, you must be disciplined in putting away the monthly amount or paying off the credit card after paying your taxes and insurance.
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