There is a bit more activity in housing market these days and more questions are raised by readers every day. With majority being first time home buyers who know next to nothing and have little money to put down, the questions on mortgage escrow account are piling up. I am going to answer all of them in this post. Personally, having escrow just twice out of probably 15 mortgages that I have had, I can state that I hate a property tax escrow account and being in the mortgage industry for a number of years, I always preach to my clients about it. To start with, let me tell you unequivocally, a mortgage escrow account offers no advantages for an average, somewhat literate borrower whatsoever. On the opposite side are the lenders and mortgage brokers who simply love it.
Q: I am to bring 5 months worth of escrow payments on closing. It is almost $11,700. Do I earn interest on mortgage escrow account?
A: No, the lender is not obligated to pay you interest. It keeps it instead. At $2,300 per month, sounds like you are buying a mansion. How does your lender/broker justifies that?
Q: Are mortgage escrow accounts required by law?
A: While there is no law imposing escrow accounts upon borrowers, the Real Estate Settlement Procedures Act of 1974 or RESPA allows lenders to set up an impound account. Lenders universally demand an escrow when you put less than 20 percent down.
Q: I am told that if I have a mortgage escrow account, the lender will assume responsibility for paying my property taxes and homeowners insurance.
A: This is the biggest misconception of many homeowners and either dishonesty or lack of knowledge of loan officers and real estate agents. You, the homeowner is ultimately responsible. If bank fails to pay taxes by one reason or the other, you will be in trouble. The mortgagors of Taylor, Bean & Whitaker learned that the hard way after the TBW failed.
Q: How low the balance on an escrow account can go?
A: The requirements which are enforced by the Department of Housing and Urban Development, better known as HUD, are that the mortgage escrow deposit should be sufficient to prevent the balance from falling below an amount equal to 2 months worth of tax and insurance payments at its lowest point during the year. That is what you bring to the closing. Inevitably, your escrow amount will get to such 2 month cushion. Once that happens, mortgagee will raise your monthly payment to build a new cushion.
Q: Can not figure out how my escrow amount is calculated. I have a feeling, my mortgage broker does not know. Can you explain?
A: The amount to bring on closing is often calculated based on following facts,
– property taxes are paid in arrears and collected by the county assessor in 2 installments each year with the due dates varying by county you live in
– annual property tax divided by 12 is equal to a monthly tax escrow payment you pay to the lender
– monthly escrow times 2 is equal to a typical reserve requirement
– installment payment lender pays on your behalf is your annual property tax divided by 2
Thus, installment payment PLUS 2-month reserve MINUS amount to be collected in monthly payments before due date is EQUAL TO the amount lender can gladly require at closing
– determine 1st and 2nd installment due dates with your county and use a calendar to calculate required tax escrow amount
Q: My husband and I are both first timers and have argued about escrow for weeks now. To him, the biggest advantage of setting a mortgage escrow account is not having to make tax payments twice a year. He would rather pay $400 extra monthly toward escrow balance than $2,400 twice a year directly to the county. He does not mind bringing almost $3,000 extra to close. I would rather earn some interest on my money.
A: Tell him that not only you give these $3,000 to the bank plus $400 monthly for whatever number of months before the tax due date, but your bank then lends these money back to you charging the interest you are paying on your mortgage. So much for an advantage?
Q: Our county due dates to pay taxes are the beginning of May and August. So we have 3 months and 9 months in-between. While 9 months is plenty to accumulate the necessary 6-month tax amount, the 3 months from May to August are not enough and really put us in a bind this year. I am refinancing and want to establish escrow account. Thoughts?
A: This tax schedule is very uncomfortable to put it mildly. Do not escrow, unless there are requirements for this refi to go through. Instead, put aside your monthly tax payment every month. Just escrow the money to yourself.
Q: I am told my mortgage insurance premium will be included in escrow payments. Is that right?
A: Yes it is.
Q: Will my monthly association dues be included in mortgage escrow payment?
A: No, association dues are paid to the management company that takes care of common grounds in a condo or townhouse association and has absolutely nothing to do with mortgage escrow account.
Q: Should I refinance to save .375% in interest rate? Comes around $40 in monthly savings. The mortgage broker pays the closing. The only requirement is to set an escrow account. Otherwise I have to pay $1,000 in closing costs.
A: Your mortgage broker gets more money from the bank for selling you an escrow, so he or she can cover the entire closing cost. It is up to you, but I would tell your broker to keep an eye to let you know when you can get the same rate without escrow. Also you can shop around or ask your current mortgagee for a little rate cut. Many will do for the same $1,000 or less and without much hassle.
Q: I am an army vet and looking at either the FHA or VA loan. What are the requirements with regards to escrowing taxes and insurance?
A: For the loans guaranteed by the Federal Housing Administration, escrow account is one of must-have requirements. The Veterans Administration does not require escrow accounts to be maintained on all loans, but almost all lenders will demand it.
Q: What happens if county taxes increase or decrease?
A: If they increase, your mortgage monthly payment which includes escrow payment is very like to increase as well. Otherwise your escrow balance will run short. If they decrease, you will likely to get a nice letter from the lender informing you about it. Unless your county taxes decrease substantially enough. Then your lender is likely to decrease your monthly payment also, in order not to maintain too large of an escrow balance, which in some cases can be against the law.
Q: My mortgage is being transferred to another bank? Should we expect new requirements on mortgage escrow account from a new lender?
A: New lender will look into your escrow account. Unless there is a shortage of funds coming soon, your monthly payment should not change.
Q: What are the laws about terminating escrow? I am fed up with Chase raising my monthly payment every 6 months.
A: Depends on the state you have the property, to the best in my knowledge. Many states, including Illinois have a law that lets borrower terminate escrow account when the mortgage is reduced to 65% of its original amount by timely made payments. You, of course, can not be in default. One of the law requirements is that the lender must notify the borrower that he may terminate the escrow account.
Q: I have a buyer on my house. What happens with my mortgage escrow account after the closing?
A: You should get the remaining balance at closing.
Q: After refinancing will be my escrow account transferred to the new bank.
A: No, you will have to fund the new escrow with new funds. You old bank has no more than 30 days after the closing to send you the remaining balance.
Similar Posts:
- How to Find the Best Mortgage Deal for your Home?
- Refinancing mortgage and credit card debt
- Home equity line of credit – Top 5 points to consider before applying
- Bankruptcy Foreclosure: What is it all about?
- Absolute success tips to become a qualified mortgage broker
Recent Comments