Bank can charge extra 0.25% fee to borrowers who bypass escrow


April 10, 2005

We are in the process of buying a new home. We have informed the lender, Chase Manhattan Bank, that we would like to pay our real estates taxes directly to Harford County and homeowners insurance directly to the insurance company. Chase has informed us that to comply with our request, they will charge us 1/4 of one point of the amount mortgaged. Our down payment will be greater than 30 percent, which avoids the requirements for PMI insurance and an escrow account for real estate taxes.

The question is, can Chase legally collect a charge from us for not escrowing our real estate taxes and homeowners insurance in the state of Maryland?

The bank is following industry standards in charging an extra 0.25 percent to borrowers who don't escrow funds for real estate taxes and insurance.

There's a slightly higher risk for the lender when it does not control payment of real estate taxes. If the borrower fails to pay, the unpaid taxes will become a lien on the property ahead of the lender's mortgage.

Lenders also benefit from collecting monthly escrows for taxes and insurance because they earn interest on these funds.

The usual charge for waiving escrows is a quarter percent per year of the mortgage principal, $250 on a $100,000 mortgage loan.

Surprisingly, higher-risk borrowers may find that lenders do not require escrows for real estate taxes and insurance. These loans bear significantly higher interest rates than loans to the most credit-worthy borrowers. The higher rates compensate lenders for taking the extra risk of waiving tax and insurance escrows. Borrowers also see a lower monthly payment since taxes and insurance are not included. But these high-interest borrowers often are jolted when they have to pay a six-month tax bill or an annual insurance premium.

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