Post-Ownership & Maintaining Your Financial Future

The Escrow Accounts

Because mortgage companies often change or merge, escrow accounts can vary. It’s important to stay of top of things. After all, we’re talking about your most valuable investment.

Escrow accounts were mentioned earlier when we discussed the loan process. In this case, we are referring to the loan servicer that pays property taxes and homeowner’s insurance when they are due. Part of the monthly mortgage payment is put into escrow for these items.

FYI: The amount held in escrow is calculated by adding the total of the year’s real estate taxes owed by the homeowner and the homeowner’s insurance premium divided by 12.

Property/real estate taxes and homeowner’s insurance are not fixed, as your mortgage loan may be, although they are included in your monthly payment. Taxes almost always increase as well as premiums. So, lenders are allowed to require slightly higher escrow payments to cover those increases. The maximum “extra” money a lender is allowed to accumulate is two escrow payments. This is all governed by the Real Estate Settlement Procedures Act (RESPA).

Sometimes problems arise with escrow accounts, such as:

• Escrow payments are too high. The balance on the annual statement of the account is more than $50 above what is needed to make the property tax and insurance payment. The lender should provide a refund to the homeowner as long as performing loan is in good standing.
• Escrow payments are too low. An estimate of what the taxes and insurance premium will be for the year has been made. If the lender’s estimate is too low and there isn’t enough cash in the account, the homeowner is expected to make up the difference. Then the monthly escrow will be adjusted to reflect the difference.
• Sudden escrow payment increases. Occasionally, the company that makes your loan payments changes. The new company may have different escrow practices that may create an unusual increase in your escrow payments. Other or new incidentals may be local government tax assessments for road, sewer, or sidewalk improvements. Check with your loan service to make sure there aren’t any errors and/or to make payment arrangements.
• Late payments from an escrow account. Every now and then a company holding the escrow account fails to make a payment on time for your taxes or to your insurance premium. Keep a record of when these bills are due and verify their payments. Late payments can incur penalties and other additional costs. If the lender is the negligent party, they are responsible for the payments, not you, the homeowner.
• Loan servicing. The company that collects the mortgage payments and allocates them is the loan servicer. The servicer may or may not be the company that receives or holds the mortgage.

Refinancing

Refinancing is the process of getting a new mortgage or renegotiating your current terms on your home loan. All of the same issues arise for refinancing as when you were looking for your initial mortgage loan. (This includes all of the original fees):

• Application fee
• Credit check
• Appraisal
• Title search or title insurance
• Origination fee
• Discount points
• Mortgage insurance

These costs can add up to 3% - 6% of the amount borrowed. Before refinancing, ask your current lender about refinancing and how to save on some of these costs.

When does refinancing make sense?

As with most things, you want to weigh your initial loan cost against eventual savings from refinancing. Hopefully, you’re reducing your interest rate a couple of percentages on your 30-year mortgage that will also reduce your monthly payments.

• You may decide to refinance from an adjustable rate mortgage (ARM) to a fixed rate mortgage before interest rates rise during the life of your loan.
• You may decide that you’d like to consider changing the size or terms of your loan.
• You may want to increase the loan amount to pay for home improvements, sending a child to college, or starting a small business at home or some other important expense. Try to avoid using your mortgage to finance your vacation or for purchasing a vehicle.

Compare the total interest costs of all available financing options before you move forward with refinancing your mortgage to pay for consumer goods.

PMI

Private Mortgage Insurance (PMI) – usually required by lenders for mortgage loans if the buyer provides less than 20% of the purchase price.

• The PMI protects the lender for losses if the borrower fails to make the loan payments.
• If you are a borrower who is required to have PMI, make sure you review and understand the conditions by which the mortgage insurance can be canceled.
• Government regulations require lenders to cancel the PMI when the homeowner has paid the equivalent of 20% in equity, or the loan’s outstanding balance has decreased to less that 80% of the appraised value of the home through appreciation, or the repayment of the principal of the loan, or for a set period of time (seven years is the common set time). FHA loans’ PMI’s are determined for the life of the loan and cannot be canceled.
• For a general idea of the Loan-to-Value ratio (LTV) for your home, compare the market value figure including your annual property taxes and the loan balance listed on your annual mortgage statement. Once you’ve reached a minimum of 20% equity, contact your lender to cancel the mortgage insurance if your loan is not an FHA loan.

Mortgage Insurance Premium (MIP) – Some lenders may refer to mortgage insurance premium instead of Private Mortgage Insurance. MIP is the fee paid by the borrower for mortgage insurance. These fees are usually paid on mortgage loans with less that 20% down payment.

Home Equity

Home Equity is the amount of home the homeowner actually owns. At closing, the down payment is the actual amount the new homeowner owns – the rest belongs to the bank. With time, homeowners can build and evaluate their equity to make decisions that can affect whether or not it is time to refinance, sell or cancel the homeowner’s mortgage insurance. The following will help estimate your equity and thus influence certain decisions regarding your home:

• Loan repayment. You will receive a yearly statement from your lender describing how much you have paid for interest, principal, and other items. Remember, during your first few years of mortgage payments, the majority of your payments are paying toward the interest on the loan – not on the principal. So it takes time to build up equity. You can make additional monthly payments directly to the principal to build equity in your home.
• Improvements. Certain capital improvements like remodeling and updating the kitchen and bathroom can greatly improve the marketability of your home. Please note: the amount spent on improvements may not equal the market value. Consult with a real estate professional, appraiser or tax assessor as to what improvements would be of best value in your home and in your particular neighborhood.
• Appreciation. The value of you home may increase as the demand for housing increases in a particular neighborhood. It’s all based on the supply and demand theory. You can check the market value of your home based on its listing the annual property tax bill.
• Equity can decrease. Due to neglected or incomplete repairs and maintenance. A small or minor problem can escalate into a major problem that might involve building inspections, citations, even condemnation of the property. As mentioned earlier, poor workmanship on repairs or improvements can also decrease the value of your home, the overall quality of a neighborhood plays a major role in the value of the homes in that particular community.

The local economy also plays a role in the value of your home. A regional economic downturn due to a factory closing or other large layoffs can create a decline in the pricing of homes.

Using home equity in the form of a home equity loan allows homeowners some freedom to use the cash for college tuition, major home improvements, large medical expenses, even starting a small business. Be careful, this type of loan may have many attractive features such as a lower interest rate than personal or consumer loans. A home equity loan uses the home as collateral or security for the loan. This means, if the loan is not paid on time, the lender can force sale of your home to pay off the debt of your loan. Also, be cautious of loans that are adjustable, the loan may initially have a low interest rate, but rates may increase within a few short months. As with any loan, make sure you understand the terms of your loan and give careful consideration to the risk involved in a home equity loan before accepting an offer from one of many eager lenders.

Homeownership and Taxes

Homeownership provides you with a tax shelter based on two major expenses associated with owning your own home. The good news is these expenses – mortgage interest payments and property taxes – can be deducted from your federal and in many cases your state income taxes. For more detailed information about your state and federal income taxes check out the IRS website: www.irs.gov.

Many states also offer “homestead credits” that allow reductions in property taxes to eligible households; for example, low-income households, elderly or families with disabilities. Be sure to research specific tax credits available to you.

Remember, property taxes are the main revenue used for schools, highways and other local services. Property taxes are determined by an assessment of the property and on the area’s tax rate. A tax assessor provides assessed values and the assessed value may or may not be equal to the fair market value.

Tax values and rates are assessed differently from community to community. Expect local government to make changes to the assessed value annually. These changes may also include any additions or improvements made to the property.

Improvements that are replacements or repairs do not usually increase the value of a property. When paying property taxes, most homeowners make these payments as part of their monthly mortgage payments. This payment is held in an escrow account.

You should research the various homestead programs to see if you are eligible for any of these and other programs to reduce your property tax payments.

REMEMBER: Keep all your record: home loan documents, homeowner’s insurance, receipts, warranties, contracts, maintenance schedules, and a list of important documents regarding your home, in a safe place where you can easily get to them if you need them.

Go to Quiz Four