Some lenders will either charge a slightly higher interest rate or a fee for waiving your escrows before closing. The reason for this is that there is more risk to the lender if taxes and insurance are not paid.

If you fail to pay your property insurance when the premium is due, and your house burns down your insurance company is obviously not going to honor a claim to have it rebuilt. The chances of you continuing to make payments on a home you cannot live in are very small, so the lender greater likelihood of you defaulting on the mortgage. For this reason your mortgage company is exposed to slightly higher risk because they are relying on you to pay your insurance on time, without fail.

If a homeowner ignores to pay real estate taxes on his property, a tax lien would eventually be placed on the property. In a foreclosure procedure, the government tax lien takes priority over any other liens and is satisfied before all others. To justify the higher risks, banks charge higher interest rates if the homeowner chooses to not have the bank escrow property tax payments.

Many lenders service their own escrow accounts, so when escrow is waived the lender loses a source of revenue. This is often offset by charging a slightly higher interest rate.

 

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