Different Reasons that Can Lead to an Escrow Cancellation

Escrow is a process in which all the legal documents and paperwork are in possession of a third party that acts neutrally between the buyer and the seller.

The lender also has to create an account, so that the insurance premiums, property taxes and any other related payments can be paid off. This is done when an application for mortgage is approved and closed. The borrower is also required to pay off taxes, insurance premiums, hazard coverage, assessment, repair costs and other incurred expenses that cannot be paid at closing time on a monthly basis.

There are several reasons as to why an escrow account must be established. Certain governmental mortgage programs specify an escrow account as mandatory. In some regions, the law states that an escrow account is essential for tax collection. A few banks also require an escrow account if the borrower does not meet the eligibility criteria like a down payment that is less than 20%.

Whatever the reasons may be behind the formation of an escrow account, it can be canceled in the following ways.

Pay off your mortgage loan

If you pay off your entire mortgage loan, your escrow account will automatically be canceled. In all arrangements that are made, it is necessary that the escrow account has funds. When you pay off your loan, this clause is violated which leads to the cancellation. Your only responsibility then is to pay your taxes and your insurance payments. All other requirements of the agreement are satisfied and hence, the escrow account is canceled because there is no need for it any more.

Sell off your property

Your escrow account will be canceled without you not violating the agreement if you sell off your home. When you receive the full selling price, you have to pay off the remaining balance of your mortgage to the lender. Moreover, when you sell off your home, you are no more obligated to pay off property taxes, which is why a cancellation can occur.

Avail mortgage refinancing

Refinancing will also allow you to satisfy your loan agreement. When you refinance your mortgage, the new loan pays off your old and then an agreement is established. This does not exactly require you to create a mortgage account, but that is only so when your lender agrees to.

Banks can consider a mortgage plan without an escrow, but they may require about twenty percent of your home equity for refinancing. This is an expensive option, particularly because the closings costs pile up.

Please note that if your state laws deem it mandatory for all mortgages to be based on an escrow account, then refinancing will not lead to cancellation. You will have to consider another options in this case.

Establish a good payment history

Your lender may agree to cancel your escrow provided that you have made timely payments in the past.

Have an LTV ratio of less than 80%

Your escrow account may be canceled if your loan to value ratio is less than 80%. However, this solely depends on your lender.