There it is, loud and clear from George. If a mortgage borrower insists on paying his own taxes and insurance it's not only more costly, but also greatly narrows down the loan programs available. Investors generally do not buy loans without them being escrowed.
My Frequently Asked Questions #8 for the ActiveRain contest that Anna 'Banana' Kruchten established in which we are to respond to the 10 most frequently asked questions that we are asked most often, is one that I get more often from existing homeowners than I do from First Time Homebuyers. FAQ #8 has really a Yes and No answer.
"FAQ #8 ......... Do I Have To Escrow My Taxes & Homeowners Insurance?"
The Yes answer to this question, is that a Borrower can pay .125 points to not escrow for their taxes, and .125 points to not escrow for their homeowners insurance. But, and you knew there would be a but, many Lenders will not do a mortgage without the homeowners insurance and taxes being escrowed through the Borrowers monthly mortgage payment.
The reason why Lenders will not allow a Borrower to pay their homeowners and taxes on their own is because:
- Of the additional risk - If the Borrower does not pay their taxes the town/city will place a tax lien against the property, and the Lender will no longer be in the first position if the Borrower defaults on the loan. Also if the Borrower does not pay their homeowners insurance, and their is a fire that destroys the property, the Lender is left with a worthless asset.
- Investor requirement - Many investors will not purchase the mortgage for the same reasons above, therefore, the Lender will not do a loan that they do not have the option to sell later.
I have never understood why a Borrower would not want to escrow their taxes and homeowners insurance. Those that do not want to escrow for taxes and homeowners insurance will always make the following statement "Why should I let the Mortgage Company use my money, I will put it in the bank and be the one to earn interest on it in stead of the bank". This may sound good but it real isn't a valid reason.
Escrow Accounts are governed by the State Banking Commission, as a result:
- Lenders can not use Borrowers Escrow Account Fund for anything else but to pay for the items that the money was escrowed for.
- The State Banking Commission sets an interest rate yearly that Lenders are mandated to pay on Escrow Accounts. The interest rate that is established by the State Banking Commission is equal to or greater than the average interest rates that are being paid on regular savings accounts.
So there really isn't any advantage for a Borrower to put their money in a bank account, and pay their taxes every six months and homeowner insurance once a year. Also, why would anyone want to take the chance of not having saved enough money to pay the huge tax bill that comes every six month, or once a year like six town here in Connecticut do. I for one would much rather have it included in my mortgage payment every month, and know for sure that the money will be there when these bills come due. That is my opinion, because I have never been a fan of having to write out a check for thousands of dollars to the tax collector every six months. It is painful enough to have to do it for my cars, and that bill is much less.
Previous FAQ's Blogs.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org