How Long Do You Have to Pay Escrow on Your Mortgage?

An escrow account for mortgages is used to collect money for large lump payments due throughout the year. Your lender charges a portion of the payment each month and holds the funds in an account until the due date. 

Depending on your loan type, the money you pay into your escrow account each year typically goes toward property taxes, home insurance, and mortgage insurance.

Learn more about how long you’ll make escrow payments, when it’s possible to get escrow waived, and the pros and cons of removing it.

What is an escrow account for a mortgage?

After you close on a home and start making payments, your lender takes a portion of your monthly payments and puts that money into an escrow account to cover future expenses on your behalf.

“It’s essentially a savings account managed by your lender to cover property taxes and homeowner’s insurance,” says Randall Yates of VA Loan Network. 

While borrowers could set the money aside themselves, escrow accounts ensure enough funds have accrued to cover costs when they’re due. Many lenders use escrow accounts to guarantee property taxes are paid on time, avoiding late fees or liens against the property. Escrow accounts also ensure there won’t be a lapse in coverage with your home insurance provider. 

How long do you pay escrow on a mortgage?

Because escrow accounts are used to collect money for important payments, such as home insurance or property taxes, escrow payments are typically included in mortgage payments until the loan is paid off. Meaning, your mortgage escrow timeline is essentially the same as your loan term.

Austin Rulfs of Zanda Wealth Mortgage Brokers adds, “Usually, unless you elect to cancel your mortgage, you pay into an escrow account throughout its term. Long-term homeowners usually find this arrangement dependable since it guarantees consistent payment of your taxes and insurance on schedule.” 

When can you cancel escrow on your mortgage?

Escrow cancellation eligibility varies. Each lender may have its own in-house rules, but the rules can also fluctuate depending on which government-sponsored entity purchased your mortgage. Fannie Mae and Freddie Mac have very similar rules to one another, but there are some slight variations.

Borrowers can typically remove escrow on mortgage payments if they have a certain loan-to-value ratio (LTV) set by the lender and they haven’t recently missed any payments.

Requirements for canceling escrow on a mortgage

Borrowers often have to reach a certain LTV to qualify for escrow cancellation, but other rules may also apply. Fannie Mae, for example, requires that borrowers must be able to show they can handle lump sum payments.

Freddie Mac, on the other hand, specifies that the unpaid principal must be at or below 80% of the original appraised value. Additionally, the borrower must not have missed any payments for the past six months. 

Yates adds: “Lenders often require a solid payment history with no late payments. They may also want some kind of proof that you can manage paying taxes and insurance independently, so you may have to provide some sort of evidence that you consistently pay your bills on time.” 

To learn the requirements for removing escrow from your mortgage, you may want to refer to the loan agreement you signed when first getting your mortgage. If you need more information, you can speak with one of your lender’s loan officers.

Pros and cons of removing escrow from your mortgage

There are pros and cons to removing escrow from your mortgage. Before you make any decision, consider the benefits and drawbacks of removing your escrow from your mortgage.

Pros:

• Lower monthly mortgage payment: Your monthly mortgage payment may only require principal and interest moving forward if you remove escrow. This should lower your monthly mortgage by a significant margin.
• Opportunity to invest: While you’ll still want to put aside money each month for future insurance and tax payments, you’ll have more cash available each month. With that extra money, you could invest into a savings account, CD, or money market account. 
• More hands-on: Home insurance is easy to forget about, especially when your lender handles payments. Premiums can go up without you realizing it. By paying your home insurance yourself, you can be more aware of costs. 

Cons:

• Easy to forget about important payments: If it’s not on your radar, it can be easy to forget to pay your property taxes or home insurance bills. Should this happen, you could accidentally put yourself in financial jeopardy.
• Escrow requirement could be reinstated: Both Fannie Mae and Freddie Mac stipulate that, while you can get the escrow requirement waived, they have the right to reinstate it later.

“While removing escrow gives you more control over your money, it comes with risks, as you’ll need to handle large lump-sum payments for taxes and insurance, which can be challenging without financial discipline,” says Yates.