Borrowisely! » escrow

My fixed rate mortgage payments keep changing from year to year. Am I missing something?

Elena Romanova — Sat, 06 Dec 2008 00:55:58 +0000

Each period mortgage payment is in fact a combination of several payments: towards the interest, towards the principal (if the mortgage is not interest-only) and optionally towards PMI and the escrow. With a fixed rate mortgage the interest and the principal parts are usually unchanged unless you make extra payments, but the PMI and/or the escrow can get altered. Under the provision of the 1999 Federal law, for example, lenders are required to cancel private mortgage insurance (PMI) on most home mortgage loans made after July 29, 1999. Cancellation will occur automatically when amortization has reduced the loan balance to 78% of the value of the property at the time the loan was made. So if you have been paying PMI for years, it may well be that it just got cancelled after all. It’s a one-time event, though, and is not very likely to affect every year’s payments. The escrow payments, however, are more dependant on external factors. If taxes and/or insurance premiums, for instance, go up, the lender needs more funds to cover the rise. Thus, even if your mortgage is a fixed rate mortgage with what you expect to be quite even payments, the actual amount of money you have to pay each month can change because of the escrow. If taxes rise, you should expect an unavoidable rise in the payment.

How do I know if my escrow works?

Elena Romanova — Sat, 06 Dec 2008 00:51:21 +0000

The RESPA requires the lender to provide initial and annual escrow account statements. Do make sure you get one. But for the “good to know” feel, it is your proof in any legal procedure should you find out something is wrong with your escrow account. You always need to check with the other party, too – the tax office, the insurance company, etc. – to make sure their bills are paid accurately on your behalf. You may also try to reschedule the issuing of the escrow statement with your loan servicer – depending on the time of the year you take out your mortgage loan, the annual escrow analysis date can be changed, so that your payments could be adjusted more efficiently to reflect insurance premium and tax increase more quickly.

How much is an escrow payment?

Elena Romanova — Sat, 06 Dec 2008 00:49:23 +0000

Before you buy a house, contact the county property appraiser and tax collector to find out how much the fully assessed property taxes will be, as well as an insurance agent for an estimate of how much your homeowner‘s insurance premiums will be. Find out about other payments to be placed in escrow. Sum all the tax and insurance premiums to be paid within the 12 months following the closing date, and divide the result by 12. For example, taxes – $600 paid July 15 and $780 paid December 13 and hazard insurance – $300 paid September 10 add up to $1680. Divide this total amount by 12 (number of payments in a year). $1680 divided by 12 = $140. This is your monthly escrow payment. However, the tax and insurance payments come due quite unevenly throughout a year. It may well so happen that a large payment is due in the very beginning, when the amount accumulated in the escrow account is not enough yet to cover it all. To prevent the balance from dropping to negative lenders are allowed (but not required!) by the Real Estate Settlement Procedures Act (RESPA) to maintain a financial cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. Section 10 of the RESPA limits the amount of money a lender may require the borrower to hold in an escrow account. Note: if state law or mortgage documents allow for a lesser amount, the lesser amount prevails! For our sample escrow account with its lowest -$840 in December, the cushion will be: $840 (to make sure the balance does not drop below zero) plus $280 (1/6 of the total escrow charges, i.e. 1/6 of $1680 = $280) = $1120. This is the amount you have to pay for the very first month at closing.

For a more detailed analyses of how escrow works read my special article.

Do I always have to agree to have an escrow attached to my mortgage?

Elena Romanova — Sat, 06 Dec 2008 00:45:47 +0000

Generally speaking, mortgage escrowing is not mandatory. In fact, sub-prime mortgage market offers mortgages without any escrows, which I personally find very weird, because sub-prime borrowers are a lot more likely to have problems paying taxes and insurance. Escrow payments, naturally, make overall monthly mortgage payments higher and thus less attractive to such borrowers. A mortgage with an escrow included stands no chance on this market. Other mortgage products, however, usually include an escrow at the wish of the lender and no equivalent escrow-free alternatives at the same wish. You either agree to it or you don‘t, in the latter case you have to be able to put at least 20% down and pay a certain fee – around 1/4 to 3/8 of a point – to have the escrow waived.

How can I cancel my mortgage escrow?

Elena Romanova — Sat, 06 Dec 2008 00:42:20 +0000

You have to buy your way out straight away at closing or any time later. It may not be easy, though. Lenders and servicing agents make pretty good income on escrows, so they will not be eager to let you get away with that easily. You may have to be very insistent, persistent and determined contacting them, and most importantly: either your down payment should cover at least 20% of the property’s price if you want to cancel the escrow at the very beginning, or you have to have a perfect mortgage payment history – no late payments or underpayments etc. to the mortgage itself – to meet the criteria to be released from escrow later. You should also expect a fee of around 1/4 to 3/8 of a point. Escrow service is usually included into a mortgage package, and you either agree to it, or you don’t, but it is hard to find an alternative without an escrow included and good conditions otherwise.