Refinance guide escrow waiver on refinance should you keep it

Escrow waiver on a refinance — should you keep it?

When you refinance your mortgage, one decision you’ll likely face is whether to keep the lender-managed escrow account for property taxes and homeowners insurance, or to “waive” it and pay those bills yourself. This article explains what an escrow waiver is, when it makes sense, the pros and cons, typical costs, the step-by-step process during a refinance, common pitfalls, and a short FAQ to help you decide.

What an escrow waiver is — and when it makes sense

An escrow account is a pool the lender manages that holds money collected as part of your monthly mortgage payment to pay property taxes and insurance when due. An escrow waiver allows you to opt out of that arrangement and handle tax and insurance payments yourself.

An escrow waiver can make sense if you:

• Have reliable budgeting habits and want direct control over tax and insurance payments.
• Prefer to hold the funds yourself to earn interest or use short-term cash management strategies.
• Have low loan-to-value (LTV) and meet lender or investor criteria that permit waivers.
• Want to avoid an escrow cushion (a required reserve that increases monthly payments).

Benefits and drawbacks

Benefits

• Control and flexibility: You manage when and how payments are made and can shop insurance policies directly.
• Potential short-term earnings: You can keep funds in an interest-bearing account until bills are due.
• Simpler monthly mortgage payment: Without the escrow portion, your mortgage payment appears lower (but remember you still must pay taxes and insurance separately).
• Avoid escrow shortages or lender mismanagement affecting payment timing.

Drawbacks

• Responsibility and risk: You must budget reliably — missed tax or insurance payments can lead to penalties, lapses in coverage, or tax liens.
• Possible lender resistance: Many lenders or loan programs require escrow accounts (especially government-backed loans) or deny waivers for higher LTVs.
• Potential fees or higher interest: Some lenders charge an escrow waiver fee or offer a slightly higher interest rate instead of allowing a waiver.
• Loss of convenience: You won’t have the lender handling payments or warning you of upcoming bills.

Costs and fees to expect

Costs related to an escrow waiver vary by lender and loan investor rules:

• Escrow waiver fee: Some lenders charge a one-time or annual fee to grant a waiver. It may be a flat fee or a small percentage of the loan amount.
• Interest-rate trade-offs: In some refinances, lenders may offset the risk of a waiver by offering a marginally higher rate or fewer credits toward closing costs.
• Escrow cushion: If you keep escrow, lenders may require a cushion (commonly one to two months’ worth of payments) that increases your initial monthly payment or closing cash requirement.
• Refunds/holdbacks: On refinance, any remaining balance in your old escrow account is typically refunded to you at closing, but timing varies.

Always review the Loan Estimate and Closing Disclosure for spelled-out escrow fees and any waiver-related charges before closing.

Step-by-step process when refinancing

Here’s how the escrow decision typically plays out during a refinance:

• Prequalification and application — Discuss with your loan officer whether your loan program and LTV permit an escrow waiver. Some programs (often government-backed) may require escrow.
• Loan Estimate — Lender discloses whether escrow will be required and lists any escrow waiver fee or cushion amounts.
• Shop and compare — Compare offers from multiple lenders not just on rate, but on escrow policies and waiver costs.
• Proof of payment setup — If you plan to waive escrow, the lender may require you to show a plan for paying taxes and insurance on time (bank statements, a history of on-time payments, or automatic bill pay setup).
• Signing documents — If waiver is allowed, you’ll sign an escrow waiver agreement at closing; if escrow is retained, closing documents will show the escrow balance transfer and any required cushion.
• Post-closing — If you waived escrow, set up reminders or automatic payments for your tax and insurance due dates. If you kept escrow, verify the lender establishes the account and collects the correct monthly amount.

Common pitfalls to avoid

• Assuming waiver is free — Always confirm whether there’s a waiver fee or an interest-rate concession trade-off.
• Underbudgeting for large bills — Property taxes and insurance can jump; make sure your savings buffer covers increases and annual/biannual payments.
• Forgetting due dates — Missing tax or insurance payments can trigger penalties, lapses in coverage, or lender-required force-placed insurance, which is costly.
• Ignoring loan program rules — FHA, USDA, VA, or other investor guidelines may require escrow; don’t assume every refinance qualifies for a waiver.
• Not collecting the old escrow refund — Verify you receive any remaining escrow balance from your prior lender at refinance closing.
• Overinvesting escrow funds — If you invest the money you would have put into escrow, remember liquidity is important; market losses don’t excuse missed bills.

Short FAQ

Q: Can I always waive escrow when I refinance?

A: No. Whether you can waive escrow depends on the loan program, the lender’s policies, and investor rules. Government-backed loans often require escrow, and lenders may deny waivers for high LTV ratios or borrowers with poor payment histories.

Q: Will I get back the escrow balance from my old loan at refinance?

A: Yes — typically the old lender refunds or transfers any remaining escrow balance at closing. Confirm the amount on your Closing Disclosure and follow up if the refund is delayed.

Q: What happens if I miss a tax or insurance payment after waiving escrow?

A: Missing payments can lead to penalties, interest, tax liens, or homeowners insurance cancellation. If insurance lapses, the lender may purchase force-placed insurance at much higher cost and charge you for it.

Q: Is an escrow waiver a good idea to earn interest on the money myself?

A: Potentially, but weigh the interest you might earn against the cost of an escrow waiver fee, the risk of missed payments, and the convenience of automated payments. For many homeowners the financial benefit is modest compared to the added responsibility.

Deciding whether to keep or waive escrow on a refinance is a mix of personal finance habits, loan program rules, and costs disclosed by the lender. If you’re disciplined with budgeting and understand the potential fees and risks, a waiver can provide control and cash flexibility. If you prefer convenience and protection against missed payments, keeping the escrow account is often the safer path. Always review disclosures carefully and ask your loan officer to explain escrow-related charges before signing.

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