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We offer a complete line of Texas mortgage loans, Texas
home equity loans and Texas mortgage refinance loans for all types of borrowers
with low Texas mortgage rates.
Why escrow taxes and insurance?
I subscribe to two very distinct
schools on this subject and they are as
follows. The
first one is, if you don’t want to mess with it or go to the trouble of saving a
lump sum
to pay your taxes and insurance at the end of the year and when the insurance
becomes due
again, escrow the funds. Pay the funds within your monthly payment. The other of
course
is simple, pay them yourself when they are due. Save the
money yourself and
accrue
interest on your own money instead of someone else making money from you.
The first scenario is a typical choice that thousands of borrowers contract to
every
month with many of the transactions closing in any given month. It’s safe,
simple, it’s
standardized and it’s audited by the government. It’s also practical.
The second scenario, although beneficial requires
responsibility. Taxes are due
at the
end of the year. In order to be prepared to pay those taxes, you must save the
cash
somewhere to be prepared for the bill. The same goes for insurance although
insurance
isn’t due at the end of the year. It’s due whenever a 12 month period has
passed. If you
bought your house in April and you made your first payment in June, 12 months
from June
the insurance becomes due.
Escrowing means a third party like a
title company collects your money and puts
in a safe
place for its intended use. After a transaction, the funds are placed in the
lender’s
bank account. This method is no different anywhere in the US or anywhere in any
state.
Years ago, the Congress of the United States adopted the
Real Estate Settlement
Procedures Act (RESPA), which includes the regulation of escrow accounts and
strict
reporting requirements on lenders.
If you are buying a home, the title company will usually collect 4 months of
taxes and 14
months of insurance. The reasons are simple. Here’s an example:
Your closing is in May and your first mortgage payment is due in July. Starting
with
July, 6 mortgage payments will be made that year. Within those 6 payments will
be 6
months worth of taxes. Since you closed in May, you are responsible for May and
June’s
taxes and insurance. From May to December is 8 months so you will need a total
of 8
months worth of taxes. Since 6 months will collect part of it, the remainder
will be paid
up front or in advance at closing. Since the title company is collecting 4
months that
totals to 10 months or 6 monthly payments plus May and June. There are two
months worth
left over and that is kept for reserve. This is because taxes fluctuate with out
notice.
Any amount remaining after taxes have been paid is retained or returned to the
borrower.
So in conclusion, the 4 months collect at closing are distributed as follows.
Two months
towards the yearly taxes and two months in reserve.
Insurance is much the same way except insurance is paid forward. If you close in
May,
taxes are paid 12 months in advance instead of the end of a year. So the lender
collects
12 months to be paid out to an insurance company at closing with two months
reserve for
any fluctuation in premium costs.
Conventional conforming loans or standard Fannie Mae and Freddie Mac loans
require you to
either put down 20% for a purchase in order NOT to escrow or if you put down
less than
20% escrow becomes automatic. In order to pay your own taxes and insurance, you
must put
down 20%. Sub prime lenders, hard money lenders and some commercial banks don’t
always
require escrows.
In the case of a
refinance loan, escrows are a little more complex and are based
on what
month you close in, but also take into account the entire year because ownership
isn’t
changing hands.
If this all sounds complicated, it is. However, I can explain as much as
possible with
one or two phone conversations with you at your
convenience. Once you understand
it and
have done it at least once, you will know and understand it from now on.
Call me today 281-597=9234 or e-mail me.
Vinni100@netzero.net
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