Month: September 2016

When you decide on your mortgage and lender, you may want to consider an escrow account.

This holds money to pay for your mortgage-related bills, such as property taxes and property insurance. And, while escrow accounts aren’t mandatory, they do help you stay on top of your important bills.

Escrow accounts are usually held by your lender and can be set up when you take out a mortgage. To fund the account, you make an initial deposit. At that point, the lender calculates an amount to be added to your monthly mortgage payment. This may include insurance premiums and property taxes.

For example, if you purchase a home with property insurance totaling $100 a month, prior to closing you must pay the insurer $1,200 for the first year’s coverage.

This $100 per month will then be added to your mortgage payment and held in the escrow account until it’s needed to pay next year’s insurance premium.

In the same way, the property tax amount will be added to your mortgage payments and held in escrow to pay your property tax bill.

These bills will be paid on your behalf from your escrow account, thanks to mortgage servicing (the handling of the daily functions of a mortgage.)

The responsibility for mortgage servicing can rest with your lender or a separate mortgage servicing company; both follow defined procedures and are regulated by the federal government.

The servicer will make adjustments to the escrow account annually, as property taxes and insurance premiums do change. If one expense is underestimated, you’ll need to top up your monthly mortgage payment, or write a check for it. Overages will be refunded.

You may waive the escrow account, but your lender can require a higher down payment and/or credit score, and charge a premium on the rate, to compensate for assuming the added risk, if you don’t pay your bills.

Prepayment penalties are imposed by some lenders on borrowers who either pay off, or pay down, their mortgage loan ahead of schedule. But take note, some states don’t allow these prepayment agreements and others have restrictions on them. Check your state regulations before you start your home search.

Prepayment penalty agreements usually last for three years. But even during these three years, borrowers will be able to pay off up to 20% of the principal per year without incurring the penalty. After that period, penalties won’t apply, even if you totally pay off your mortgage.

Penalties can be substantial

Penalties vary by lender, and can amount to the better part of six-month’s interest. For example, on a 30-year, $150,000 mortgage at 4%, six months of interest totals $2,989.15 – not a negligible amount.

To compensate for offering a lower interest rate, some lenders will include a prepayment agreement on a mortgage. This means the lender, and the investors who purchase their loans, will make something on the loan if you refinance, want to take advantage of lower interest rates or sell earlier than you anticipated.

If you are considering a loan that has a prepayment penalty, ensure you fully understand the terms. And know your options: If, for example, you expect to relocate during the penalty period, you may want to look for loans without prepayment penalties. If you plan to stay in your home, but would like the choice to refinance during the penalty period if interest rates decline, you’ll also want to consider your options.