Can I Add Escrow to My Mortgage Later?
Discover if and how you can add an escrow account to your existing mortgage for easier property tax and insurance management.
Managing homeownership finances can be complex, especially regarding mortgage escrow accounts. Homeowners who initially managed property taxes and insurance independently may later consider adding an escrow account to their existing mortgage. This article explains mortgage escrow accounts and the process of adding one.
What a Mortgage Escrow Account Is
A mortgage escrow account is a savings account managed by your mortgage servicer. Its primary purpose is to collect and disburse funds for property-related expenses. This arrangement simplifies the payment process for homeowners by bundling these costs with your regular monthly mortgage payment.
Escrow accounts typically cover property taxes, homeowner’s insurance premiums, and sometimes private mortgage insurance (PMI). Each month, a portion of your mortgage payment goes into this account. When property taxes or insurance premiums are due, the servicer uses these funds to pay them.
Servicers conduct an annual escrow analysis to review activity and project future costs. This analysis ensures sufficient funds for upcoming expenses and may adjust your monthly contribution if tax or insurance amounts change. This system prevents large, infrequent lump-sum payments for these costs.
Requirements for Adding Escrow
Adding an escrow account to an existing mortgage is possible, but at your mortgage servicer’s discretion. Lenders have specific criteria for establishing an escrow account on an existing loan. These requirements manage the financial risk of ensuring consistent payment of property taxes and insurance premiums.
Common conditions include a history of on-time payments, often with no recent late payments within the last 6 to 12 months. Servicers may also require a specific loan-to-value (LTV) ratio, such as 80% or less, indicating sufficient home equity and reduced risk.
The type of loan you have can also influence eligibility. For instance, loans backed by the Federal Housing Administration (FHA) typically require an escrow account throughout the loan’s life. While some conventional loans might allow for an escrow waiver if certain equity thresholds are met, adding an escrow account to an existing conventional loan generally aligns with lender preferences for risk mitigation. It is crucial to contact your specific mortgage servicer to understand their unique policies and eligibility criteria for adding an escrow account.
Adding Escrow to Your Mortgage
Once you have determined your eligibility, the process of adding an escrow account to your mortgage begins with initiating contact with your mortgage servicer. You can typically reach out to them via phone, their online portal, or a written request. When contacting them, be prepared to provide your loan number and other personal details, and inquire about any specific forms or documentation required for the request.
A significant step in establishing a new escrow account is making an initial lump-sum deposit. This deposit is necessary to fund the account sufficiently for the first few months of property taxes and insurance premiums. The amount of this initial deposit is generally calculated to cover a cushion, often equivalent to two to six months of estimated tax and insurance payments, plus any amounts that will be due before sufficient monthly contributions can accumulate. For example, if annual taxes are $2,400 and insurance is $1,200, the monthly escrow portion would be $300, and an initial deposit might range from $600 to $1,800 or more, depending on due dates and the servicer’s cushion requirement.
After the initial deposit, your monthly mortgage payment will be adjusted to include the new escrow amount. This means your payment will now encompass principal, interest, and the monthly contributions for taxes and insurance. Your servicer will typically send you documentation detailing the new payment structure and any agreements you need to sign. The activation timeline for the escrow account and the new payment to take effect can vary, often ranging from 7 to 30 business days after all necessary documents and funds are received.