To understand them you have to apply your personal situation. You have at least these scenarios and more.

1. Purchase. You should escrow. Why? All lenders have a pass through charge of .25% of loan to you. From Fannie/Freddie. That is 250 per 100k loan. That adds up in 250-350k loan.

2. Purchase after. The lender will pad your escrow at purchase 3 extra months. Why? To even out the next 3-4 years. Insurance and taxes change over time. Eventually it gets out of wack.

Then you get hit with a shortage. Pay lump sum or 5-6 month payment plan. Sucks. But bottom line those costs increase.

3. No escrow. Opt out when you hit 20% equity. t Except FHA. If that is what you want. Show the lender that through purchase contract, debt reduction, debt vs new value. Even with 20% down at purchase saving the .25 fee is worth it.

If opting out of escrow is desirable, use the lender the first year and opt out the second year and save the Fannie fee.

Or the escrow/mortgage servicer screws it up in year one and tries to refund you an overage because they failed to pay your school district and city taxes.

That is an extreme outlier and can happen but is a very rare outcome

If you plan to opt out make sure your servicer allows it.

yeah i went from zero to pissed off in milliseconds when i figured it out

"All lenders have a pass through charge of .25% of loan to you."
"No escrow. Opt out when you hit 20% equity"

Curious, based on the second comment, does the first not apply if the LTV is <80% at closing?

Not sure what you're question is.

if your down payment is >20% do they still charge the fee for not escrowing?

You have to have 20% plus to opt out of escrow and yes you have to pay it on conventional loans. Most times it's built into your rate/pricing which leads folks to confusion.

You can opt out with out 20% if you do a two loan scenario. A 80/10/10 for example

I'm talking about not getting hit with "all lenders have a pass through charge of .25% of loan to you"
they charge this for anyone doing escrow? even if only borrowing say $400k on $800k property?

Cannot avoid it regardless of down payment on conventional but maybe some lenders for jumbo would not charge it. Jumbo is loans greater then 424k.

I have a jumbo and do not escrow and I don't pay the .25%. I was aware of this issue prior to the transaction and compared the same loan both with and without escrow.

It is not a recurring charge fee. One time at closing.

Jumbo loans are outside the Freddie/Fannie pricing model, most are portfolio product and don't carry the charge.

Say you put 20% down at closing and chose to escrow. Is it common for the services to charge the fee if you choose to stop escrowing a year later?

Almost never. I always give my clients that exact advice. Set it up at closing, let the lender pay the taxes the first year and opt out the next. There will be a small administrative fee but much less then the Fannie fee at closing.

Be sure your servicer allows it prior to closing.

Thanks for the advice. I emailed Wells Fargo and our escrow account will be deleted in ten days. I am so glad to be rid of their terrible estimation skills. I can easily bank an extra $500 a month without having to worry about my mortgage payment changing every year...for the few more year until I pay off this house!

We opted out of escrow on new construction purchase with >20% down conventional non-jumbo. I had to show the lender that our previous house also didn't have escrow from the get go and there were no issues over the 9 years I paid on it.

The new lender approved the no escrow and did not charge a defined fee for it. I asked if the fee was hidden somewhere like built into the rate and was told it was not. OP may tell me that the fee really is built into the rate, but we got an excellent rate that beat out the other lenders we had on the table (I shopped around).

All in all we are no escrow again and extremely happy that way.

Your lender paid the fee. You did not see it cause the lender paid the fee by eating it or charging you in a different way.

You paid it or your mortgage guy paid it.

Oh and knowing mortgage my guess is you paid in your rate and closing cost.

Why put 20% down when money is so cheap?

Good question

There are some slight inaccuracies in your post when it comes to servicing the loan. The servicer is not required to allow waivers of escrows if an escrow account has already been established, the sole exception is for properties in California, which cannot require an escrow account to be established or maintained if the LTV is lower than 80%. The requirements for escrow waiver changes from servicer to servicer. The servicer I worked for had a standard policy of denying waivers in all cases except for California, and in California they had to provide evidence that their LTV was below 80%.

The lender also does not collect 3 extra months at purchase, they collect a 2 month cushion (the legal limit in 47 of the 50 states) and then they collect the non-payment month's escrows in advance (i.e. Close April, no payment in May for which the escrows are pre-collected, first payment in June). The servicer then proceeds to maintain a 2 month cushion on escrow.

If the servicer runs an escrow analysis and determines that the account is short they either offer you the opportunity to pay the shortage up front to avoid further increases in your monthly payment or they spread the shortage over a 12 months minimum if the shortage is greater than a single month's escrow payment. They can opt for fewer months if the shortage is less than a single month's escrow payment, but most use the 12 month spread in order to standardize the process. The lender can spread a shortage over more than 12 months if it will keep the borrower paying in their home (I've seen spreads of 60 months for delinquent taxes/taxes that were paid incorrectly by the lender in error, the spread decreases by 12 months for each successive year).


How is an escrow shortage/surplus calculated? The servicer takes the previous year's escrowed items and uses those as estimates for future payments. They then take your initial balance and deposit 1/12th of the previous year's disbursements on a monthly basis, and make the projected disbursements in their appropriate months. They locate the low balance for the year and if the low balance is below the 2 month cushion they deal with it as previously explained, if it exceeds that 2 month cushion it is refunded to you.


It's important for you to pay attention to when your servicer runs an analysis and whether your lender has actually made the appropriate disbursements and is collecting the appropriate amounts. Errors are rare, but if you have a large surplus they likely screwed it up, if you have a large shortage they likely screwed it up the previous year or the current year.