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The Black Hole

Dec 6, 2011   //   by Ben Gerritsen   //   Home Buyer Tips, Mortgage News  //  Comments Off on The Black Hole

There is a big unknown black hole when it comes to escrow accounts.

  • How do escrow accounts work?
  • Why should I have one?
  • Does it cost more or is it cheaper to have an escrow account with my mortgage?
  • What is an aggregate adjustment?
  • How do refunds work when my loan is paid off?
  • On a purchase loan, do I really have to pay for a full 1 year of premium upfront for the home owners insurance or can I just pay monthly?
  • How much is collected for property taxes at closing?

Each of these items are not only not understood by new home owners, but there are real estate agents that do not understand ALL of these items. As recent as this week, I have dealt with a real estate agent that I assumed understood escrow accounts and each of these items. This is a real estate agent that I would not have guessed that does not understand escrow accounts. Wow, this blew me away when I hung up the phone. And then he professed that the banks don’t know how to handle insurance on a purchase tranaction. The ironic thing is he was basing his information on a cash purchase scenario. There is a big difference between a cash transaction and a purchase transaction.

How do escrow accounts work?

Escrow accounts hold funds for essential payments associated with owning a home. These services are:

1) Property Taxes

2) Home Owners Insurance

3) Mortgage Insurance

Why should I have one?

A vast majority of home owners live on a fixed income and have a set budget. When property taxes and home owners insurance comes due each year, this can be a big chunk of money to pay an annual premium.

Most people do not have the money set aside to pay the payments at one time. There are people that just do not have the ability to come up with their property taxes when their payments come due.

The home owners insurance can also be a big amount of money if paid annually.

Does it cost more or is it cheaper to have an escrow account with my mortgage?

By electing to NOT have an escrow account, there is an additional .25% to the fee’s

This is with every lender. It doesn’t matter if it is Wells Fargo, Citi-Mortgage, GMAC, Sun Trust, any mortgage lender in the country or a credit union, they all charge an additional .25% for this. This is factored in by the secondary market. Why is there this charge? It is because there is a higher risk to the property to go into foreclosure from the county if you don’t pay your property taxes. If you don’t pay your home owners insurance (hazard insurance) and there is a fire or any type of damage, the insurance will not pay out and the lender is the one left holding the bag.

Because of this additinoal risk, it costs more. Hence, it only makes sense to have an escrow account set up for not only the lender, but also for the home owner.

On a purchase loan, do I really have to pay for a full 1 year of premium upfront for the home owners insurance or can I just pay monthly?

Ever lender requires that one (1) year of home owners (hazard) insurance premium to be paid (in full) at closing (at the title company). The premium is collected up front. Then there is a monthly payment collected each month and at the annual anniversary mark, the mortgage company (servicer / servicing company), they will mail the annual premium payment to the insurance company.

How much is collected for property taxes at closing?

Each state property taxes are due in a certain month and on a day of that month.

IE. Many states property taxes are due in November.

So if you are setting up a new loan in October, the lender will require that you pay the next years property taxes (12 months), plus 1 extra month (see aggregate adjustment).

If you are setting up a new loan in November, the lener will collect 14 months (Next year, plus the November payment + 1 more month for the no skipped payment month). If you loan is in December, 3 months (Nov., December & January). If your loan is set up in June, you count, Nov. through June + 1 extra month.

What is an aggregate adjustment?

When setting up a new loan, there is always an additional 2 months worth of the annual premium for the home owners (hazard) insurance that is collected at closing. For the property taxes, there is always an additinoal 1 month of the annual property taxes collected, this is for the month that the mortgage payment is skipped.

How do refunds work when my loan is paid off?

When paying off your loan, any additional funds that are remaining in your escrow account are to be returned to you by your escrow mortgage company (servicer / servicing company).

If you are a real estate agent or someone in the industry, this is basic information to understand.

Please take the time to understand this.

If you are a home owner, you need to understand this yourself as it is important to understanding this part of finances. It will be key for your whole life.

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