Escrow Removal Fee?
It has been a year since posting this question: Mortgage sold to yet another servicer. What are my options?, and I am happy to report that I have not had any problems with this new servicer. However, following the advice in the answers/comments, I still requested that I pay my own escrow. (I had to wait a year into the loan to build up credit/trust before I was allowed to request the removal.)
However, now they are trying to charge me a fee of 0 to process the request. According to the letter, I must:
Pay a one-time escrow removal fee of 0.00, which represents .25% of your original loan amount, and it covers our costs in monitoring non-escrow loans' tax and/or insurance payments for the term of the loan.
My questions are:
Is this fee normal/fair?
Does it make financial sense to follow through? As in, will I make this money back in interest over the span of 29 years?
Regarding the second question, my taxes/insurance is ~00 per year, all bills paid semi-annually. According to my simple math ((00*0.5%)*58 payments) = 0, meaning as long as I make a half a percent in interest on my money, it would be even. Obviously this math does not represent cumulative interest, but I don't believe it should since I will be losing the principal avery 6 months. There would be some accumulation here, but I have neglected it.
I will also have to provide documentation to them after each payment I make to prove I am paying, which might be more of a headache than it's worth, but that's a separate issue.
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Consider that the bank of course makes money on the money in your escrow. It is nothing but a free loan you give the bank, and the official reasons why they want it are mostly BS - they want your free loan, nothing else.
As a consequence, to let you out of it, they want the money they now cannot make on your money upfront, in form of a 'fee'. That explains the amount; it is right their expected loss by letting you out.
Unfortunately, knowing this doesn't change your options. Either way, you will have to pay that money; either as a one-time fee, or as a continuing loss of interest.
As others mentioned, you cannot calculate with 29 years, as chances are the mortgage will end earlier - by refinancing or sale. Then you are back to square one with another mandatory escrow; so paying the fee is probably not a good idea.
If you are an interesting borrower for other banks, you might be able to refinance with no escrow; you can always try to negotiate this and make it a part of the contract. If they want your business, they might agree to that.
Assume they do not overwithhold. You pay in 0/mo, and every time it hits 00, they pay the tax. Engineers call this a sawtooth function, it looks like this.
The average balance is not 00, but close to 00. The very simple math is 00 * rate * years.
It looks like your equation except it's not 58, it's just the years. And the question is whether you can make more than 0 on 00 average before you sell. I wouldn't be so quick to plug in 29 years, as the average home ownership is 7 years, and depending, who knows if a refinance is in your future?
The bottom line - How long would it take you to get a 57% return (2350/1500)? Ironically, the most responsible (and risk averse) person would say "decades. Banks offer less than 1%." even an 8% market return, while not guaranteed, is close to 7 years. But, if you carry 18% credit card debt, you can pay it down a bit each month and let it float back up every 6 months. Less than 4 years to break even.
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