Are mortgage lenders sitting on your money?

Most mortgage-holders tend to think of escrow payments as a byproduct of borrowing.

It doesn't have to be.

When George Currie of Brevard County, Fla., applied for a mortgage recently, he and his wife asked the lender not to withhold escrow for taxes and insurance.

"We can manage it ourselves," says Mr. Currie. "Escrows go up and down, and we feel more in control when we manage it."

The Curries also view escrow as a practice that costs them opportunities for financial gains. A borrower cannot use the money sitting in the escrow account, which draws no interest for the borrower.

During the life of a 30-year mortgage, a lender holds an average of $2,000 annually in escrow. A savvy investor might earn $200 per year on that amount. Taken times 30 years on a compounded basis, that can amount to $12,000.

Still, most lenders require borrowers to make a monthly escrow payment along with their mortgage payment. The lender then uses the escrow money to pay tax and insurance bills when they come due. As a result, homeowners are protected from lapsed insurance or past-due taxes.

Pay more to go it alone

Yet many lenders will waive escrow requirements at the request of the borrower. In lieu of an escrow account, however, lenders will often increase the mortgage's interest rate (usually by .25 percent) and require at least 20 percent equity in the property. For their part, the Curries say they did not pay any additional fees to avoid escrow since they had excellent credit.

The best time to ask a lender about such a waiver, loan experts say, is when you apply for the loan.

"Among the most-common questions I get from homeowners is: 'How do I get my lender to stop withholding escrow?' " says Sandy Gadow, author of "All About Escrow and Real Estate Closings."

"I tell them to call the lender, but [that] most lenders won't terminate escrow for an existing loan," she says.

The best recourse for those who failed to get escrow waived from the outset, she says: Dial your way up the hierarchy at the lending organization, and hope for a sympathetic ear.

Escrow accounts first appeared in the early 1930s when many Americans began losing their homes because of late tax payments. In 1934, the Federal Housing Administration (FHA) made escrow accounts mandatory for loans it insured. Other lenders soon followed. Today, FHA and the Veterans Administration (VA) still require escrow accounts.

In fact, about 75 percent of mortgage loans have escrow accounts, according to the Mortgage Bankers Association of America. Lenders say consumers actually benefit from these accounts in the following ways:

* Any shortfalls in the account to pay taxes and insurance is generally covered by the lender. In fact, in 1989, lenders advanced more than $600 million in escrow shortfalls. The borrowers were allowed to pay back these shortfalls over as many as 12-months interest free.

* Your tax and insurance bills are paid on time. If not, the lender must pay the penalty.

* Local government does not have to get involved in tax collection from hundreds of thousands of borrowers. Instead, 100 or so lenders each send one check along with a list of taxes owed.

Ms. Gadow says these accounts can be beneficial for those who lack the financial discipline to save money on their own. "I think escrow is a good feature. It lets you pay your taxes on an installment plan."

Examining your escrow

Homeowners can also check up on their escrow accounts since lenders must follow certain ground rules on how they are administered.

Briefly, lenders are required to give borrowers an annual statement that summarizes the funds collected and the amounts paid for taxes and insurance. If an escrow account falls short, the lender must tell the homeowner why the payments were underestimated and provide a plan to make up the shortage.

If the account has too much money, the lender must refund any amount over $50 within 30 days of the analysis.

Want to talk to someone about your escrow account? Contact your lender and ask for the loan- servicing department.

This may get confusing if your original lender has sold your account to another lender. But regulations require that you be notified by the lender as to who is going to be servicing your loan. The new lender must provide you with a toll-free number that you can call for information.

If you still don't feel comfortable with the way your money is being handled, contact a mortgage auditing service that will analyze your entire loan, including calculation of your correct escrow.

(c) Copyright 2000. The Christian Science Publishing Society