"Can I Close My Escrow Account in Illinois Once My Mortgage Is Paid Down to 65 Percent?"

Years into an Illinois mortgage, usually without any ceremony, your loan balance crosses a line the state wrote into law: 65 percent of the amount you originally borrowed. If you got there with on-time payments and the loan is otherwise in good standing, Illinois requires your lender to send you a notice saying the escrow account can come to an end if you want it to.

Yes, in many cases. Once on-time payments bring the mortgage on the single-family Illinois home you live in down to 65 percent of its original amount, and you are not otherwise in default, your lender has to tell you. You can then end the escrow account or keep it, and the choice is yours.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, including Illinois, NMLS #483943, through C2 Financial Corporation. I'll walk you through what the Illinois statute says, where it does not reach, and what your monthly payment looks like once the escrow account is closed.

How does the Illinois 65 percent escrow rule work?

The rule comes from the Illinois Mortgage Escrow Account Act, which is chapter 765, act 910 of the Illinois Compiled Statutes. The Act on the Illinois General Assembly's site applies to each mortgage lender "in conjunction with the granting or servicing of a mortgage on a single-family owner occupied residential property."

In plain terms, it covers the company that made your loan and the company that services it, as long as the home is a single-family home you live in.

Section 5 of the Act sets the trigger. The mortgage has to be reduced to 65 percent of its original amount by your payments, "timely made according to the provisions of the loan agreement secured by the mortgage," and you have to be "otherwise not in default" on the loan. Once both are true, the lender has to notify you of your option.

The option has two sides, and the choice is yours. You can end the escrow account. You can also keep it going until you ask to end it or until the mortgage is paid in full, whichever comes first.

The 65 percent is measured against your original loan amount. It is not a percentage of what the home is worth today, so you get closer to it only as you pay down principal, and a rise in your home's value does not move you any closer.

That makes the Illinois rule different from the national answer. On most loans, as I explain in whether you can skip the escrow account and pay your own taxes and insurance, closing the account after the loan is made is a question for your servicer's written policy. In Illinois, a state statute puts the notice and the choice in your hands.

The 2023 change for higher-priced mortgage loans

Illinois amended Sections 5 and 7 of the Act in Public Act 103-322, which the General Assembly's bill status page for House Bill 2717 shows taking effect on July 28, 2023. The amendment deals with one kind of loan, called a higher-priced mortgage loan.

A higher-priced mortgage loan is a federal category for a mortgage whose annual percentage rate is far enough above an average market benchmark that federal rules add extra protections to it. One of those protections is an escrow account that has to stay open for a set period. The rule that governs it is Regulation Z, which is found in 12 CFR Part 1026.

The 2023 amendment added subsection (b) to Section 5. A lender that complies with the Regulation Z escrow requirements for a higher-priced mortgage loan is treated as meeting the Illinois notice requirement. So on that kind of loan, following the federal escrow rules counts as meeting the Illinois 65 percent notice.

The same amendment changed Section 7, so that you cannot end the escrow on a higher-priced mortgage loan under the Illinois Act unless you have also met every condition for cancellation in Regulation Z. The federal rule at 12 CFR 1026.35 generally keeps that account open for at least five years after the loan closes. After that, a cancellation on your request needs the unpaid balance to be below 80 percent of the home's original value, and you cannot be delinquent or in default.

If you are not sure whether your loan was a higher-priced mortgage loan, your servicer can tell you. It is a fair question to ask in the same letter where you ask about closing the escrow account.

Loans backed by Illinois or the federal government

Section 7 of the Act carves out one more group of loans. The statute says you do not have the right to end an escrow arrangement under Section 5 "in conjunction with mortgages insured, guaranteed, supplemented, or assisted by the State of Illinois or the federal government that require an escrow arrangement for their continuation."

The test in that sentence has two parts. The loan has to be insured, guaranteed, supplemented or assisted by Illinois or the federal government, and that program has to require the escrow to continue. If your loan is an FHA loan, a VA loan or another government-backed loan, I'd ask your servicer in writing whether the program behind your loan requires the escrow to continue, because that is the question the statute asks.

Closing the escrow account when you dispute a shortage in writing

Escrow accounts sometimes run short. The servicer may have advanced its own money to pay a tax bill or an insurance premium, or the annual review may show a deficiency. The Illinois Mortgage Escrow Account Act addresses what happens to those amounts when you ask to close the account.

The lender cannot refuse to close the account over unpaid escrow advances or a shortage when you have told it in writing that you believe those amounts are wrong. If you dispute the amount in writing and you meet the other conditions, the account still closes.

The lender keeps its other rights, though. The statute leaves both sides with every other right they have to collect, or contest, those escrow advances and shortages. So the disagreement about the amount continues on its own track, separate from the decision to close the account.

Your monthly payment after the escrow account closes

Your escrow account is where part of each monthly payment is set aside so your servicer can pay your property tax and homeowners insurance for you. How an escrow account works covers the cushion and the yearly review in more detail.

Once the account is closed, the escrow portion comes out of your monthly payment, so the payment you send the servicer goes down. Your property tax and insurance cost exactly the same as before. The difference is that you now pay the county and the insurance company yourself, on their schedules.

That puts two sets of due dates on your calendar. In Cook County, your tax bill comes in two installments, and my post on whether the seller's Illinois homeowner exemption carries over to you explains how those installments and the tax years line up. Your homeowners insurance renews on its own date each year, and the renewal premium becomes yours to pay before the policy lapses.

If you still pay monthly mortgage insurance, please ask your servicer how that piece is handled before you decide. Freddie Mac's guide, Section 4201.15, does not let the lender waive escrow for mortgage insurance you pay monthly, or where escrow is required by law. My post on how to remove mortgage insurance covers when that payment can come off.

How to close your escrow account in Illinois, step by step

1. Please find the original loan amount on your note or your final closing disclosure, and multiply it by 0.65. That is the balance you are watching for.
2. Please compare that number to the principal balance on your latest monthly statement. If you are at or below the number, and every payment has been made on time, you are at the line the statute describes.
3. It helps to know what kind of loan you have. If it is FHA, VA or another government-backed loan, or a higher-priced mortgage loan, the sections above apply first.
4. If the notice has not arrived, you're welcome to write to your servicer. Please ask whether your loan qualifies to end the escrow account under the Illinois Mortgage Escrow Account Act, 765 ILCS 910, and what they need from you.
5. Before you sign off on the change, please put the next property tax installment and the next insurance renewal on your calendar, and ask the servicer how any balance left in the account will come back to you.
6. If the servicer reports a shortage you believe is wrong, please dispute it in writing. The Act's protection is written around a written claim of error.

Keeping the account is also a perfectly good choice. Some Illinois owners like having the servicer handle both bills, and the statute lets you keep the account until you ask to end it.

Common mistakes with the Illinois escrow rule

Measuring against the home's value instead of the loan. The Illinois trigger is 65 percent of the original loan amount. A higher appraisal does not get you there sooner, and a home that has lost value does not hold you back.

Treating a refinance as a continuation. A refinance is a new mortgage with a new original amount. If you are thinking about refinancing your Illinois home, the 65 percent is measured against the new loan, so it helps to know that before you choose the new loan amount.

Assuming the notice will always come. On a higher-priced mortgage loan, a lender following the federal escrow rules is treated as meeting the notice requirement. On a government-backed loan that requires escrow, the right to end it does not apply. Your loan type decides what the 65 percent line means for you.

Spending the escrow money. The tax and insurance money is still owed, just on a different schedule. One simple habit is to move the same monthly amount into a separate savings account, so the money is there when each bill arrives.

An illustration with made-up numbers

The numbers below are invented to show the mechanism. They are not a real client and not a prediction about your loan.

A couple bought a home in Naperville with an original loan of $320,000. Their tax bill runs $7,800 a year and their homeowners insurance $1,800, which is $9,600 a year, or $800 a month in escrow.

Original loan amount                 $320,000
Illinois trigger (65%)              x    0.65
                                    ---------
Balance that reaches the line        $208,000

Once their principal balance reaches $208,000 with every payment on time, the Act's notice applies to their conventional loan. If they choose to end the escrow account, their monthly payment drops by $800.

Monthly payment with escrow            $2,700
Escrow portion removed                 - $800
                                       ------
Monthly payment to the servicer        $1,900

From that point, they pay the county's tax bill and the insurance renewal themselves. In this example they set up an automatic $800 monthly transfer into a separate account, which keeps the money ready for each bill.

Your next step in Illinois

If you are buying or refinancing in Illinois, I'd be glad to show you a payment with the escrow built in, so you know what it would look like with and without it. You're welcome to look at your own numbers here, where you'll see pricing for your scenario and can choose a rate option, and you can change that selection later. Buying a home in Illinois covers the attorneys, the title company and the rest of what is different about financing here. You are also welcome to call me, and we can look at your statement together.

Nothing here is a loan approval, a denial, a commitment to lend, or legal advice. Your servicer and your loan documents decide how the Act applies to your loan, so please confirm it with them.

Common questions

When can I close my escrow account in Illinois?

Under the Illinois Mortgage Escrow Account Act, the trigger is when your on-time payments reduce the mortgage on your single-family, owner-occupied home to 65 percent of its original amount, and you are not otherwise in default. At that point the lender must notify you that you may end the escrow account or keep it until you ask to stop or the loan is paid off.

Does the Illinois 65 percent escrow rule apply to FHA or VA loans?

Section 7 of the Act says you do not have the right to end the escrow arrangement on a mortgage insured, guaranteed, supplemented or assisted by Illinois or the federal government when that program requires the escrow to continue. If your loan is FHA, VA or another government-backed loan, I'd ask your servicer in writing whether the program requires your escrow to continue.

Is the 65 percent based on my home's value or my loan amount?

It is based on the loan. The statute measures the mortgage against "its original amount," which is the amount you borrowed. A change in your home's market value does not change the trigger.

Can my lender refuse to close my escrow account because of a shortage?

Not over a shortage you dispute in writing. The Act says the lender cannot refuse to close the account over unpaid escrow advances or shortages that you have said, in writing, are wrong. The lender keeps its other rights to collect those amounts.

What changed in the Illinois escrow law in 2023?

Public Act 103-322, effective July 28, 2023, added that a lender complying with the federal Regulation Z escrow requirements for a higher-priced mortgage loan is treated as meeting the Illinois notice requirement. It also requires you to meet the Regulation Z cancellation conditions before ending escrow on that kind of loan.

Will my mortgage payment go down if I close my escrow account?

Yes. The escrow portion comes out of the monthly payment you send your servicer. Your property tax and homeowners insurance still cost the same, and you pay them yourself on the county's and the insurance company's schedules.