Everything You Need to Know About Canceling an Escrow Account

An escrow account is a secure financial arrangement in which a third party holds funds until the completion of a transaction. It is also used to manage property taxes and insurance payments.

Once the closing occurs and the money and property ownership exchange hands, the escrow account closes. However, sometimes, it is kept open, or a new account is opened to manage property taxes and insurance. Another scenario is when an escrow account is canceled during a transaction before closing. Irrespective of the reasons for such a decision, you must understand the complexities of escrow termination.

Today, we will discuss the ins and outs of escrow accounts and how to cancel them.

Key Takeaways

Escrow Account Defined

An escrow account is a neutral third-party holding account where funds are kept safe during a transaction between two parties. Commonly used in real estate transactions, this account helps facilitate payments and ensures all parties fulfill their obligations before the escrow company releases the funds. As a result, it provides security and peace of mind to all parties involved in the transaction.

For the buyer, it offers assurance that funds are held until all conditions are met, safeguarding against potential risks. Similarly, for the seller, it guarantees that payment is securely held until the transaction is completed to satisfaction. Lenders also benefit by having a mechanism to ensure financial commitments are met before disbursing funds, mitigating their risk.

An escrow account is also used to manage property taxes and insurance. These accounts ensure that money designated for specific purposes is used appropriately and released when required.

This account's closing usually coincides with fulfilling all contractual obligations. However, you can also cancel escrow during a transaction.

Escrow Account Cancellation

Canceling an escrow account can refer to two scenarios:

• Cancelation during a real estate transaction.
• Cancelation of a post-closing escrow account for a mortgage (often used to manage property taxes and homeowner's insurance).

Here is how to approach each scenario and what you should know:

• Canceling an Escrow Account During a Real Estate Transaction

  Canceling escrow during a real estate transaction means terminating the transaction before closing. This cancelation can happen for various reasons, such as unmet contingencies, financing issues, or a change of heart by the buyer or seller. However, it requires careful consideration and precise timing. In addition, the process involves mutual agreement from all involved parties.

  Here is what you need to do:

  • Review the Escrow Instructions and Purchase Agreement

    It is essential to review the purchase agreement for the conditions under which you can cancel an escrow account. Consult with a real estate attorney to understand your rights and obligations. The cancelation might be necessary if there are breaches in the agreement, changes in buyer or seller circumstances, or both parties agree to handle the transaction differently. However, you must look for contingencies, deadlines, and cancelation penalties.

    In addition, confirm the disposition of earnest money in case of escrow cancellation. In many cases, the buyer is entitled to a refund if unmet contingencies exist, but they might forfeit it if they back out without cause.

  • Communicate with the Escrow Officer

    If you are canceling escrow, inform and notify the escrow officer immediately. You may need to provide written notice to cancel it officially. The officer will guide you through the process, the required information, and the implications.

  • Understand the Impact on Other Parties

    Notify your real estate agent, lender, and other parties about the cancellation. This notification will ensure everyone knows about the change and can adjust their plans accordingly.
    If any funds or documents are in the escrow account, the escrow officer will manage the disbursement or return according to the escrow instructions. You must ensure all outstanding issues are resolved to avoid future disputes.

• Cancelling an Escrow Account for a Mortgage

  Homeowners may cancel their mortgage escrow account and directly manage property tax and insurance payments. This option is usually available once the homeowner gains a certain amount of equity in their home or after meeting specific mortgage terms.

  Here is how to approach it:

  • Check the Lender's Policy

    Some lenders allow you to cancel escrow under certain conditions, such as maintaining a certain loan-to-value ratio or having a good payment history.

    However, you must determine whether you are eligible for the cancellation. You may need to submit a formal request or meet specific criteria.

  • Assess the Risks and Benefits

    Canceling the escrow account can give you more control over your finances, allowing you to manage property taxes and insurance independently.
    However, without an escrow account, you must remember to pay property taxes and insurance premiums on time. Failure to do so could have serious consequences, including tax liens or loss of insurance coverage.

  • Communicate with the Lender

    If you want to cancel the escrow account, submit a formal request to your lender. They will guide you through the process and explain any fees or additional requirements.

    You must comply with the lender's requirements, which may include proof of up-to-date payments and an adequate home equity percentage. In addition, some lenders require the loan to be at least one year old without any late payments. An additional prerequisite could be the absence of any impending tax or insurance payments within the next 30 days.

    Furthermore, some lenders charge an escrow waiver cancelation fee. Be prepared to pay this fee if required.

Wrap-Up

Understanding how to manage an escrow account effectively and, when necessary, cancel it is essential for anyone involved in real estate transactions or mortgage management. The process requires a good grasp of legal and financial responsibilities, ensuring all parties are safeguarded.

If you cancel escrow during a real estate transaction, ensure you know the implications for earnest money and other parties involved. If you are canceling an escrow account for a mortgage, assess the risks and benefits and understand the lender's requirements.

You can approach your real estate agent, escrow officer, or lender to get guidance on your concerns.

FAQs

1. Are there benefits to managing property tax and insurance payments on my own?

Yes, managing these payments can give you greater control over your finances and may save you on administrative fees charged by escrow services.

2. What criteria must I meet to cancel my mortgage escrow account?

Usually, lenders require a certain percentage of home equity and a history of timely property tax and insurance payments before allowing you to cancel your mortgage escrow account.

3. How long does it take to cancel an escrow account?

The time can vary based on lender or escrow company procedures, but usually, it may take a few weeks to process the cancellation once all requirements are met.

4. Can I reinstate an escrow account after canceling it?

Yes. You can reinstate an escrow account after canceling, but this will require agreement from your lender and may involve additional setup procedures and validation of your current financial status.