Mortgage Impounds vs. Paying Taxes and Insurance Yourself

Posted on October 21st, 2020

If you’ve been researching mortgages, or are in the process of taking out a home loan, you’ve probably come across the term “impounds” or “escrows.”

When you hear these seemingly scary words, the loan officer or mortgage broker is referring to an impound account, also known as an escrow account.

You may even be told you have to pay to remove them, or possibly accept a higher interest rate in return. Let’s learn why.

What Are Mortgage Impounds?

mortgage impounds

  • Impounds or escrows as they’re also known
  • Refers to the automatic collection of property taxes and insurance
  • It ensures you always have funds available to make these important payments
  • A portion is taken out of your housing payment each month and set aside until due

As the name implies, it is an account managed by a third-party, typically a loan servicer, to collect and disperse funds on behalf of the homeowner and lender.

Homeowners pay money into the escrow account at closing and each month after that with their mortgage payment.

Over time, the balance grows and when property taxes and homeowners insurance are due, the money is sent on to the tax collector or insurance company, respectively.

Instead of paying property taxes twice a year, or homeowners insurance once annually, you pay a considerably smaller installment amount each month instead.

This is where the acronym “PITI” comes from – Principal, Interest, Taxes, and Insurance.

You must also pay an “initial escrow deposit” at loan closing, which will vary greatly based on the month you close, and where the property is located.

Lenders may also collect one or two extra months of payments to act as a cushion for future increases in taxes and insurance, but this amount is strictly regulated.

Why Mortgage Impounds?

  • They basically protect the lender from borrower default
  • Assuming the homeowner falls behind on taxes or fails to make insurance payments
  • The monthly collection of funds ensures the money will be available when payments are due
  • And alleviates a situation where the borrower is unable to make what are often very large payments

An impound account greatly benefits the lender because they know your property taxes will be paid on time, and that your homeowners insurance won’t lapse.

After all, if you have to pay it all in one lump sum, there’s a chance you won’t have the necessary cash on hand.

Remember, the average American has little to no savings, so if a big payment is due, uh-oh!

Clearly this is important because the lender, NOT you, is the one that truly owns your home when you’ve got a giant mortgage tied to it.

And they don’t want anything to come in between the interest in THEIR property in the event you’re unable to make these critical payments.

Many seem to think lenders require impounds so they can earn interest on your money, but it’s really to protect their interest in the property.

*Some states require lenders to pay homeowners interest on their impound account balances.

In California for example, it is customary for mortgage escrow accounts to earn interest. Each year you should receive a tax form that shows what you were paid and what you OWE as a result.

Be sure to check your own state law to determine if you’ll earn interest. In any case, it likely won’t be very much money, and it’s taxable…

Impound accounts can also benefit borrowers because the money is collected gradually over time, so there isn’t that big unexpected hit when taxes or insurance are due.

For this reason, some borrowers actually prefer impound accounts, especially those that tend to do a poor job managing their own finances.

And you shouldn’t miss a payment or pay late because it’s all done for you automatically.

[Homeowners insurance vs. mortgage insurance]

Paying Property Taxes and Homeowners Insurance Yourself

  • You should have the option to pay these bills yourself
  • But only on certain types of mortgage loans
  • Such as conventional loans or those where you put down 20% or more
  • But it may cost you .125% of the loan amount

If you’re the type that likes full control over your money, you can always pay your property taxes and homeowners insurance yourself if the underlying loan allows for it.

In this case, you “waive impounds,” which usually entails paying a fee, such as .125% or .25% of the loan amount at closing.

For example, if your loan amount is $200,000, you might be looking at a cost of $250 to $500 to remove impounds.

Of course, waiving impounds/escrows may also come in the form of a slightly higher mortgage rate if you don’t want to pay the escrow waiver fee out-of-pocket.

Either way, there is typically a cost, though you can always try to negotiate with the lender to get them waived and still secure a low rate.

Just keep in mind that you can’t always waive impounds.

Impounds are required on FHA loans, VA loans, and USDA loans.

For conventional loans, impounds are generally required if you put less than 20% down.

And even then, many lenders now charge borrowers if they want to waive impounds, even if their loan-to-value ratio is super low.

In California, impounds are only required if the loan-to-value ratio (LTV) is 90% or higher. But you may still have to pay to waive escrows either way.

It’s seemingly unfair, but like all other businesses, they got creative and came up with yet another thing to charge you for. Sadly, you should be used to this by now.

How to Remove Impounds

  • You can request the removal of impounds once your LTV is at/below 80%
  • So either by paying down your loan over time or via lump sum payment
  • But there’s no guarantee the lender will agree to do so

If you initially set up an escrow account, you may be able to get it removed later down the line.

Simply contact your loan servicer and ask them to review your escrow account.

As a rule of thumb, it’s more likely to get approved if your LTV is at or below 80%. That way they know you’ve got skin in the game.

That 20% in home equity gives the lender sufficient protection from potential default if you fail to pay property taxes or home insurance in a timely fashion.

The Annual Escrow Analysis

  • Loan servicers are required by law to review your escrow account annually
  • This happens once a year on your origination date to ensure it’s balanced
  • If you paid too much you may receive an escrow surplus refund check
  • If you didn’t pay enough you may need to pay an escrow shortage

Each year on the anniversary date of your loan closing, your lender is required by federal law to audit your impound account and refund any excess over the allowable cushion.

You will also receive an escrow analysis statement that can be handy to look over.

Generally, the minimum balance required for an escrow account is two months of escrow payments, which covers any increases in taxes and insurance.

When your loan servicer projects the numbers for the year ahead, any surplus, which is your estimated lowest account balance minus the minimum required balance, will be refunded to you.

If your account balance is higher than this minimum amount, you may be refunded the difference via check. It’s a nice surprise when it comes in the mail.

Assuming you aren’t just sent a check that can be cashed, you may get the option to apply any overage to principal reduction or to a future mortgage payment.

You can also be proactive if it appears as if your impound account is a little too full. Simply call and ask them to take a look via an escrow account overage analysis.

It’s also possible that you may experience an escrow shortage, in which case you’ll be billed for the amount needed to satisfy the shortfall.

While not as nice as a check, it indicates that you haven’t been overpaying throughout the year.

The loan servicer may also give you the option to accept a higher monthly payment going forward to catch up on any shortage.

Note that both an escrow account surplus and shortage can result in a different monthly mortgage payment going forward, since they will collect more or less from you in the future.

For example, if you were paying too much last year, you might be told that your new monthly payment is X dollars less. Another unexpected surprise!

If you were paying too little, the reverse might be true – your mortgage payment may go up!

It’s Always Your Responsibility to Pay on Time

  • Regardless of how you pay taxes and insurance
  • It’s always your sole responsbility to ensure they’re paid on time
  • You can’t blame the mortgage lender/servicer if they slip up
  • So always follow up to make sure the payments are made on time

Regardless of whether you go with impounds or decide to waive them, it is your responsibility to ensure that your property taxes and insurance are paid on time, each and every year.

Sure, your loan servicer will probably pay on time, but this may not always be the case. Mistakes happen.

Also, if you’re subject to paying supplemental property taxes, your loan servicer may tell you that it’s your responsibility to take care of them on your own.

If you receive a supplemental property tax bill in the mail, you may want to call your servicer immediately to determine if it will be paid via your escrow account. If not, you’ll need to send payment yourself.

Situations like these are a good reminder to always keep an eye on your escrow account, and to keep solid records of your taxes and insurance.

In summary, it can be nice for someone else to handle these payments on your behalf, but you still have to make sure they’re doing their job!

(photo: Constantine Agustin)

Source: thetruthaboutmortgage.com

When Are Mortgage Rates Lowest?

We’re all looking for an angle, especially if it’ll save us some money.

Whether it’s a stock market trend, a home price trend, or a mortgage rate trend, someone always claims to have unlocked the code.

Unfortunately, it’s usually all nonsense, or predicated on the belief that what happened in the past will occur again in the future.

Sometimes history repeats itself, sometimes it doesn’t. We probably only hear about the times when it does because it makes the individual behind it sound like a genius.

In reality, it’s very difficult to predict anything, even the weather, so when it comes to complex stuff like mortgage interest rates, success rates probably move a lot lower.

That being said, I set out to see if there were any mortgage rate trends we could glean from available data, using Freddie Mac’s historical mortgage rates that go back to 1971.

Using 50 years of data, you would think some trends would appear, right?

Were mortgage rates lower in certain months, higher during others, or is it all just random? Let’s find out.

What Time of Year Are Mortgage Rates the Lowest?

mortgage rates by month

I looked at monthly averages for the 30-year fixed-rate mortgage over the past three decades to determine if there’s a winning month out there.

It turns out there is a month when mortgage rates are lowest, and as you might expect, it’s at a time when most folks wouldn’t even be thinking about purchasing a home or refinancing an existing mortgage.

Yes, it’s December. You know, when individuals are more concerned with holiday shopping and traveling to see family then calling up a mortgage lender.

This could explain why mortgage rates are lowest in December. If you recall, lenders pass on bigger discounts to consumers when things are slow.

As alluded to, December is always going to be a slow month for mortgage lenders, which probably has something to do with the discount seen over the past 30 years.

Keep an Eye Out for a Mortgage Rate Sale

  • Mortgage lenders operate just like other types of businesses selling products or goods
  • They price their loans based on expected profit margin and operational costs
  • If their business slows down they might be inclined to lower the price (or interest rate)
  • But if they’re doing a lot of business (or even too busy) they might keep rates artificially high

Similar to any other company out there selling goods, there are “sales” at certain times throughout the year, and also times when prices are marked up.

As you might expect, if a company is trying to move product, in this case home loans, what do they do? They lower the price to drive business.

Mortgage lenders able to lower the price, or rate, because they’ve got a margin built in to their market rate.

This margin acts as their profit, minus operational costs. Sure,they may not make as much per loan if they lower rates for consumers, but they could make up for it on volume.

Instead of closing one higher-priced loan, they might be happy to close three loans and earn more on aggregate. So they have wiggle room to play with rates a bit.

They can adjust them lower when business is crawling, and simply maintain or raise them when their phone won’t stop ringing.

How Much Cheaper Can They Really Be?

  • While mortgage rates are measured in eighths of a percent (0.125%)
  • Which may look or sound like absolutely nothing when comparing rates
  • The small difference can be exponential because you pay the mortgage each month for years (possibly 30!)
  • This explains why even a marginal difference in rate can amount of thousands of dollars over time

Okay, so we know rates vary throughout the year, and even a small difference in rate can be very meaningful. But how much can you really save?

While not massive by any stretch, you might be able to get a rate .25% lower in December versus April. Same goes for October and November compared to spring.

If we’re talking about a $300,000 loan amount, a rate of 2.75% vs. 3% is the difference of roughly $40 per month, or nearly $500 per year.

Keep your mortgage for a decade and you’ll pay nearly $5,000 more over that period.

Are You Overpaying for Your Home Loan and House in April?

  • The most common time to buy a home is in spring, namely April
  • This is when prospective buyers get serious and make offers
  • It’s also when more home sellers finally agree to list their properties
  • But it might be cheaper to buy a home during fall or winter

Now speaking of April, that month tends to be prime time for home buying historically, which explains the lack of a discount.

The same goes for buying a home during April – it’s a lot less common to see a price reduction during spring than it is during fall or winter.

It all begs the question; should we buy homes when prices, competition, and interest rates are lowest? Probably.

Just one problem – there tends to be less available inventory in the fall and winter months as well. But if you do come across something you like, it could be a great time to snag a deal.

In other words, you should always be looking, even if it’s not the ideal time to move.

If you’re refinancing a mortgage, there are less obstacles in December since you’ve already got a house.

To sweeten the deal, lenders probably aren’t busy, so you’ll breeze through underwriting a lot quicker. And you could receive a little more attention from your loan officer.

Should I Wait Until December to Get a Mortgage?

In short, probably not. While December had the lowest mortgage rates on average over the past 30 years, there were plenty of years when rates were higher in December compared to other months.

Take 2018, where the 30-year fixed averaged 4.03% in January and 4.64% in December.

Same goes for 2015 and 2016, when rates were markedly higher in December versus the beginning of the year.

However, in 2020 the 30-year fixed averaged 3.31% in April and 2.68% in December, which is a difference of 0.63%. That can equate to thousands of dollars in savings.

All in all, you’re probably better off paying attention to what’s going on in economy if you want to predict the direction of mortgage rates.

The trend (moving up or down over a period of time) might be more important than the month of year.

Simply put, bad economic news generally leads to lower mortgage rates, whereas positive news tends to propel interest rates higher.

Time of year aside, you might be able to save even more on your mortgage simply by gathering quotes from more than one lender.

Ultimately, timing doesn’t seem to be the biggest driver of rates, nor is it something most of us can control anyway.

(photo: Marco Verch)

Source: thetruthaboutmortgage.com

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The post If a Mortgage Lender Reaches Out to You, Reach Out to Other Lenders first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

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The post What Is a Streamline Refinance? first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

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The post Does a Refinance Require an Appraisal? first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

How to Get a Wholesale Mortgage Rate

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The post How to Get a Wholesale Mortgage Rate first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

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The post How to Move Out of Your Parents House first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

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The post An Alternative to Paying Mortgage Points first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

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The post 21 Mortgage Questions You Should Know the Answer To first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

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The post 10 Mortgage Lenders to Consider for the Best Mortgage Rates (and Fees!) first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com