Impounding & compounding property taxes

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Can someone please elaborate the advantages and disadvantages of impounding or compounding property taxes?

The advantage to an escroll account for taxes and insurance is that the money is set aside every month for the annual payment. The advantage is for the lender so that they can make sure that those items are paid to protect their investment. The wonderful thing is that because they call it an escroll and not a draw account they do not pay interest on the balance. The advantages are all for the lender. I have one small local savings and loan that that I work with. They never sell the service on the loan and if you have 20% down they don't require an escroll account. The intrest that you can earn on the taxes and insurance money is small compared to your loan but at least it is something.

Wow impressive Ohio Realtor. (Man I was pulling for those Bengals yesterday )
Most all lenders consider escrow optional if your LTV is under 80%. The prime conforming Fannie Mae and Freddy Mac products typically mandate escrows over 80%. You only have a choice to waive if under 80% and it typically cost's the borrower .25% of the loan amount.
One other note is escrow dispursements are made every 6 months so the lender or escrow company has time to invest that money and make a profit.
Most non-conforming lenders either do not have escrow or offer it but it typically is never mandated.

NEVER escrow taxes and insurance unless the lender absolutely requires it. If so make sure you have in writing exactly what must be done for that requirement to be dropped.
You are much better off making that monthly T&I payment into your money market account and paying your T&I from that account.
Why let the bank use your money for Free! They are not letting you use their money for Free!

Great advice! For those who do not know Money Market accounts are liquid as in you can withdraw like checking but sometimes they place a max # of times monthly. For example mine allows 4 free withdraws per month.
These accounts pay you interest from 1-5%

They also usually have a minimum $ amount that you can write a check. Mine is $250.
Originally posted by Greg Phillips:
Great advice! For those who do not know Money Market accounts are liquid as in you can withdraw like checking but sometimes they place a max # of times monthly. For example mine allows 4 free withdraws per month.
These accounts pay you interest from 1-5%

500 here. Thanks for adding that. Good info to prepare you for what to expect.

As a LO, I always tell my clients not to escrow. The main reason is because it can significantly raise their closing costs. The lender has to fund the escrow account and depending on when taxes are due in your area, it could be anywhere from 2 to 12 months worth of taxes which can result in thousands of extra dollars they need to bring to closing.
I have found my more financially savvy borrowers prefer to pay their taxes on their own, while some borrowers prefer the forced savings of escrowing. There are many people who simply forget that they have to pay property taxes and it is easier for them to pay in little pieces each month than writing a big check twice per year.

Very true! Some are just very forgetful and think most counties just take them semi- annually (Ohio). Some of them allow monthly payments even. Possibly direct withdraw and a discount.

People definitely need to be careful with not escrowing. I personally don't escrow on my properties and advise that as well to my borrowers, but it really needs to be pushed for people to discipline themselves to set aside the money each month as if it was included in their payment. Too many times I have seen people not plan correctly and now it's tax time and they're in trouble. Now they end up taking cash advances from credit cards and other means to pay for the taxes, which surely defeats the purpose.

The predominant advice is to not escrow. Let's see...
The lender charges a quarter point to waive escrow...and on a half a million loan, that is what...$1250? Say the taxes are 4 grand and the insurance another 1500.00...and you start with a third of that in escrow....and let's say it averages 2250 at all times...because RESPA (roughly) says the escrow needs to get (equivalent) of under a hundred bucks at some point in the year.
At the money market rate of 3% your return is $67.50 per year...so the payback on not escrowing is 18 years, plus the hassle of making the payments. Hmmmm. Not sure my math is right...obviously will change depending on tax rates, etc...but I hope I am communicating the idea.
Now...I don't want to and won?t argue the math...all I am saying is that you should do the math every time and then decide to escrow or not. Rarely do people keep mortgage products for 18 years anymore...and the statement to NEVER escrow might be premature, depending on the conditions and pricing of the loan.

mnrebroker,
The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.
I still say never escrow and definately Never take that that worthless credit life if offered. If you want that kind of protection then call your life insurance agent and get a 15 or 20 year term policy. Coverage will be cheaper and the amount will remain the same over the term instead of going down as your mortgage balance is paid off.

[QUOTE]Originally posted by Paul Oaks:
[QB] mnrebroker,
The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.
Well...I own a mortgage company as well as my real estate brokerage. Maybe it is different in your state, but most lenders have the waiver escrow built into the rates, which are calculated automatically on our online system. You either check the box for waiver or you don't when funding a loan. "Not telling them about it" is really not an option in the year 2006, when most conforming lending is done paperless.
It has been my experience that the lenders who do not charge the waiver are not the best priced lenders available on the rate sheet.

Not surprised you would say that from a mortgage company perspective. In IL borrowers also have the option of making a deposit into an Interest Bearing Time Deposit Account. That built-in fee is just another way to screw the consumer with a hidden charge. SO tell us from the mortgage perspective what is the purpose behind the fee?
Originally posted by mnrebroker:
[QUOTE]Originally posted by Paul Oaks:
[QB] mnrebroker,
The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.
Well...I own a mortgage company as well as my real estate brokerage. Maybe it is different in your state, but most lenders have the waiver escrow built into the rates, which are calculated automatically on our online system. You either check the box for waiver or you don't when funding a loan. "Not telling them about it" is really not an option in the year 2006, when most conforming lending is done paperless.
It has been my experience that the lenders who do not charge the waiver are not the best priced lenders available on the rate sheet.

Paul, paul, paul...
Mortgage pricing is determined by RISK. From a lender perspective, if the property taxes are not paid, the lender faces risk from the government taking claim on the property. Remember, it is the property that is securing the mortgage, so no lender wants to find themselves in a subordinate position to another entity with a claim on the property. As such, a mortgage is less risky when the lender is collecting property tax escrows because they know the property taxes are paid. Most lenders do charge .250% to waive escrows, although there are a few who do not. This .25% is usually built into the yield spread premium when the LO quotes an interest rate. It does not mean your rate is .25% higher. At most the rate would increase by .125%, if there is even an increase.
The lenders are justified in charging for it because they are taking on additional risk. They also charge a tax service fee to monitor that your property taxes are always paid. I guess the flood certification is also a junk fee. Oh yeah, borrowers shouldn't pay for credit reports either. Appraisal? Who needs that? Everyone knows Realtors price properties appropriately. Get real...

greedyBastard, greedyBastard, greedyBastard.....
Most lenders also look at past performance with regards to timely tax payments, Your RISK statement is bull when dealing with A paper clients . If the borrower has a history of always paying the taxes then there should be no .250 or even .125 percentage increase to waive payment of taxes into escrow. RISK is not the reason it is added it is Greed..something you should be familiar with based on your screen name. If the lender requires escrow and another lender cannot be found then the borrower should always go with the Interest Bearing Time Deposit Account. If anyone is going to get the interest it should be the borrower.
Your appraisal comment shows your stupidity or lame attempt at humor and regarding the flood certificate that is a worthless expense as this information is also included in the appraisal report except you do not get that pretty form from FEMA. So it is you that needs to get Real!!!
Originally posted by GreedyBastard:
Paul, paul, paul...
Mortgage pricing is determined by RISK. From a lender perspective, if the property taxes are not paid, the lender faces risk from the government taking claim on the property. Remember, it is the property that is securing the mortgage, so no lender wants to find themselves in a subordinate position to another entity with a claim on the property. As such, a mortgage is less risky when the lender is collecting property tax escrows because they know the property taxes are paid. Most lenders do charge .250% to waive escrows, although there are a few who do not. This .25% is usually built into the yield spread premium when the LO quotes an interest rate. It does not mean your rate is .25% higher. At most the rate would increase by .125%, if there is even an increase.
The lenders are justified in charging for it because they are taking on additional risk. They also charge a tax service fee to monitor that your property taxes are always paid. I guess the flood certification is also a junk fee. Oh yeah, borrowers shouldn't pay for credit reports either. Appraisal? Who needs that? Everyone knows Realtors price properties appropriately. Get real...

Paul:
I don't know whether to respond or laugh... seriously. It is obvious you have no clue. The sad part is that you will probably be "advising" your client on financing and the buyers won't know any better. I am going to try responding in between laughs...
So I guess Paul, borrowers who use 100% financing shouldn't have to pay extra either? Or the borrower who wants to cash out additional equity? Investment properties aren't any riskier either? These companies have conducted analysis of the performance of millions of mortgages and they have determined what items pose the most risk to a lender... down payments, DTI, property types, occupancy, and yes how property taxes are handled. The technical term is regression analysis. There are literally dozens of "hits" lenders will assess that may result in increased rates or fees if the risk of the loan increases.
Additionally, most mortgages are being sold to Fannie, Freddie, or other investors on Wall Street. These price adjustments reflect what INVESTORS are willng to pay for a loan with certain risk characteristics.
Remember, it is the mortgage company who is putting up the money and taking the risk. They are the ones who take the hit when the borrower defaults. If the borrower doesn't want to pay it, they can buy the home with cash.

GB,
From your posts I can see that you just love to hear yourself talk. Your sad attempts at putting words in other peoples mouths is very amusing.
We were speaking of one specific issue and you attempt to deflect the direction of my original post. I said it is Never a good idea to escrow taxes as it makes more sense to pay them from your moneymarket account. If the lender does require escrow it is a better option to choose the Interest Bearing Time Deposit Account. Other lenders and brokers seem to agree with me on this except you the greedybastard. Why is that? I am talking about A paper clients not sub-prime clients.
Remember, it is the mortgage company who is putting up the money and taking the risk. They are the ones who take the hit when the borrower defaults. If the borrower doesn't want to pay it, they can buy the home with cash. WOW REALLY!!! I must have missed class the day they covered that startling fact. Thank You so very much for bringing me up to speed on that! However did I manage to stay in the real estate business for 17yrs as broker, builder and investor :p
I am fully aware of the risk factors associated with residential, new construction and commercial loans. It is you that seems to have lost focus on the fact we were speaking of a single issue. Try to stay on track if you are up to it.

[QUOTE]Originally posted by Paul Oaks:
[QB] Not surprised you would say that from a mortgage company perspective. In IL borrowers also have the option of making a deposit into an Interest Bearing Time Deposit Account. That built-in fee is just another way to screw the consumer with a hidden charge. SO tell us from the mortgage perspective what is the purpose behind the fee?
Well Paul, the fee is what Greedy said it is...but I don't get it and neither does any other mortgage broker that I am aware of.
I am very sorry this whole thing turned into an attack...I was just trying to point out that: On the assumption that the lender is going to charge a quarter point...it may make more sense for a borrower to escrow instead of paying the quarter point. I merely suggested that each real estate agent assist the buyer/borrower by doing the math and making a case by case determination. It doesn't seem to be all tha difficult, and I would think an agent would be happy to make the calculation for the client.
There are certainly lenders who do not charge the quarter point, but competition being what it is for brokers business, it is usually built in somewhere else.
I do not doubt your experience and wisdom. I simply disagree with the simple answer. Always and never are words that should be avoided when looking at mortgage products.
I am a Real Estate Broker first. I understand fiduciary duty to be my primary focus, and I would gladly give a borrower a break anywhere I could find one on their good faith estimate. I do not personally ever charge Yield Spread Premium. But I do pass on costs to the borrower at cost...and a 1/4 point escrow waiver fee is one of those costs that I will often eliminate by recommending that the borrower does set up the escrow...for the reasons I described in my first post on page one.

Any mortgage broker that has accts with a handful of lenders certainly has a lender that won't worsen the rate for A Paper clients for waiving impoundswith an ltv of 80%, including 80-20s. Of course, many of these lenders also are capping and otherwise restricting brokers' total compensation on loans, so plenty of greedy bastards would prefer not to use these lenders. It also varies by program. Libors are pretty flexible.

mnrebroker,
I find it funny that everyone seems to complain how much Realtors make in commission but our fees are upfront and right out there for everyone to see.
The mortgage industry as a whole seems to make it there main objective to hide away as many fees into the costs of a loan as they possibly can. If the client fails to ask questions those junk fees stay and it ends up costing them more than it should. Certainly not all mortgage brokers this way but their are far too many that do. I have 3 brokers/loan officers that get all of my business because they have proven time and time again that they can get the job done with minimal hassles and no hidden fees.
[QUOTE]I merely suggested that each real estate agent assist the buyer/borrower by doing the math and making a case by case determination. It doesn't seem to be all tha difficult, and I would think an agent would be happy to make the calculation for the client.[QUOTE]
Try asking your Financial Planner if they would recommend an escrow account. My point was that there are many lenders out there that do not charge an escrow waiver fee. Most(notice I said most and not all) mortgage brokers would not mention the fee.
[QUOTE]I simply disagree with the simple answer. Always and never are words that should be avoided when looking at mortgage products.[QUOTE]
I respect your opinion but we are simply looking at it from a different perspective. Had an investor client call me last week because the company he was financing a property through wanted him to escrow taxes and insurance for the 4-plex he is buying. He owns in the neighborhood of 20 additional properties and writes 2 Large tax checks twice a year. I put him with my commercial lender who got him a better rate no doc loan with no escrow required. My lender could not believe that this broker wanted to force him to escrow. The mortgage broker in question was a relative on the his wife's side of the family.
I only have problems when the fees are hidden. If a broker wants to charge the fee then put it out in the open and drop the smoke and mirrors.

You are also forgetting that when investors purchase up to 20 properties, they tax bills may come due at different times of the year. Investment properties in particular are the only time I'd recommend setting up this account because most investors cannot keep up with all the information for the piggeyback mortgages, let alone the different property tax bills and insurance they have to pay throughout the year. The risk of assessing the escrow account up front in a primary purchase is much different than that of setting up on any investor. I too agree that if you aren't being charged for the escrow fee, it's already been built in somewhere.
Most lenders are going to charge that for fee for no other reason than they want the money and they want to ensure their investments.

Way to many personal attacks in this post.
Paul you "should" consider being more open-minded about lenders. Mortgage lending is so very different than what you are accustomed too. The amount of money that people lend is huge and far beyond the risk of a real estate brokerage and they want to protect their investment.
It is kind of like Insurance unfortunately. They classify each score and risk factor and based on actual loss they assess a price to offset loss. Just like using the "law of large numbers". Age groups for life insurance. It makes perfect sense and you are in fact spreading the risk somewhat like insurance.
However, several abuse it. Several make way too much!
It is an investor driven industry. Money is lent to make money not on good faith or acts of kindness. Without it many would never own a home on their own.
Realtor fees are very fair. Realtors drive all over the place and have a vast number of things they have to do for people who the list homes for or represent as a buying agent. Listing especially! They can spend a whole entire day servicing 1 buyer! They can do that 3 or more times in some cases.
Bashing the realtor industry will not be tolerated in this topic.
I understand how you think Paul. Some brokers and loan officers are terrible compared to others. Junk Fees.... Well sometimes they are ok as long as it it the actual fee and not an inflated fee. For example I saw a broker charge 65 for a credit report and it was not for a rescore or credit update. I charge 6.50 because that is what it costs.
Before you go nuts let me tell you what my company charges:
300 processing
300 Underwritting
6.50 credit
6.50 flood report from a 3rd party other than an appraiser because some are shady. (Inflated values and such)
All else is 3rd party. Appraisal/Title
I know there is better but they build them into the rates.
But, .25% for no escrow.. Basically, each lender borrows money and depending on what they pay they charge what they think will maintain their target profitability. They average out the escrow investment gains and then try to give a lower rate for people that escrow.
Remember there are so many nationwide lenders it is rediculous!
Multi State lending = More More More
Realtors typically need to be local. Discounters cannot give the same service. However, they do sell homes. That is fact. I bet the ratio for sales to expired listings is dramatically better for a local realtor! That is why you pay more and that is paying for Service and Availability to help you with your home when selling.
This is just a short answer. I have many more feelings and my feelings can change but at this point we are off topic.

Van,
I do not intend to continue this topic debate. My point is if a broker or lender wants to charge the fees they should do so in the open and not hide them.
Since I personally own over the 20+ investment properties I can safely say that I am aware when taxes and insurance are due on a property. My CPA prepares and forwards me the required checks when they need signing and the bills get paid. When you personally own 20+ investment propertiess then perhaps you can tell me what most investors do.
It all boils down to the fees should be out there to see and then let the consumer decide.

It all boils down to the fees should be out there to see and then let the consumer decide.Yes!
Paul, perhaps if you did not have any help and did not have credit discipline you would take comfort in just having 1 payment. It is a choice that is given to every customer. I currently am handling 43 transactions and 24 are looking to fund this month.
I study very hard an have been found at 6am in my office working my rear off. It is constant and non-stop.
Marketing is a huge expense for agents guys. All the 3rd party services add up. MLS, Signs, Gas, Food, Flyers, Mail, and it is a ton of time invested too.

Can someone please elaborate the advantages and disadvantages of impounding or compounding property taxes?

The advantage to an escroll account for taxes and insurance is that the money is set aside every month for the annual payment. The advantage is for the lender so that they can make sure that those items are paid to protect their investment. The wonderful thing is that because they call it an escroll and not a draw account they do not pay interest on the balance. The advantages are all for the lender. I have one small local savings and loan that that I work with. They never sell the service on the loan and if you have 20% down they don't require an escroll account. The intrest that you can earn on the taxes and insurance money is small compared to your loan but at least it is something.

Wow impressive Ohio Realtor. (Man I was pulling for those Bengals yesterday )
Most all lenders consider escrow optional if your LTV is under 80%. The prime conforming Fannie Mae and Freddy Mac products typically mandate escrows over 80%. You only have a choice to waive if under 80% and it typically cost's the borrower .25% of the loan amount.
One other note is escrow dispursements are made every 6 months so the lender or escrow company has time to invest that money and make a profit.
Most non-conforming lenders either do not have escrow or offer it but it typically is never mandated.

NEVER escrow taxes and insurance unless the lender absolutely requires it. If so make sure you have in writing exactly what must be done for that requirement to be dropped.
You are much better off making that monthly T&I payment into your money market account and paying your T&I from that account.
Why let the bank use your money for Free! They are not letting you use their money for Free!

Great advice! For those who do not know Money Market accounts are liquid as in you can withdraw like checking but sometimes they place a max # of times monthly. For example mine allows 4 free withdraws per month.
These accounts pay you interest from 1-5%

They also usually have a minimum $ amount that you can write a check. Mine is $250.
Originally posted by Greg Phillips:
Great advice! For those who do not know Money Market accounts are liquid as in you can withdraw like checking but sometimes they place a max # of times monthly. For example mine allows 4 free withdraws per month.
These accounts pay you interest from 1-5%

500 here. Thanks for adding that. Good info to prepare you for what to expect.

As a LO, I always tell my clients not to escrow. The main reason is because it can significantly raise their closing costs. The lender has to fund the escrow account and depending on when taxes are due in your area, it could be anywhere from 2 to 12 months worth of taxes which can result in thousands of extra dollars they need to bring to closing.
I have found my more financially savvy borrowers prefer to pay their taxes on their own, while some borrowers prefer the forced savings of escrowing. There are many people who simply forget that they have to pay property taxes and it is easier for them to pay in little pieces each month than writing a big check twice per year.

Very true! Some are just very forgetful and think most counties just take them semi- annually (Ohio). Some of them allow monthly payments even. Possibly direct withdraw and a discount.

People definitely need to be careful with not escrowing. I personally don't escrow on my properties and advise that as well to my borrowers, but it really needs to be pushed for people to discipline themselves to set aside the money each month as if it was included in their payment. Too many times I have seen people not plan correctly and now it's tax time and they're in trouble. Now they end up taking cash advances from credit cards and other means to pay for the taxes, which surely defeats the purpose.

The predominant advice is to not escrow. Let's see...
The lender charges a quarter point to waive escrow...and on a half a million loan, that is what...$1250? Say the taxes are 4 grand and the insurance another 1500.00...and you start with a third of that in escrow....and let's say it averages 2250 at all times...because RESPA (roughly) says the escrow needs to get (equivalent) of under a hundred bucks at some point in the year.
At the money market rate of 3% your return is $67.50 per year...so the payback on not escrowing is 18 years, plus the hassle of making the payments. Hmmmm. Not sure my math is right...obviously will change depending on tax rates, etc...but I hope I am communicating the idea.
Now...I don't want to and won?t argue the math...all I am saying is that you should do the math every time and then decide to escrow or not. Rarely do people keep mortgage products for 18 years anymore...and the statement to NEVER escrow might be premature, depending on the conditions and pricing of the loan.

mnrebroker,
The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.
I still say never escrow and definately Never take that that worthless credit life if offered. If you want that kind of protection then call your life insurance agent and get a 15 or 20 year term policy. Coverage will be cheaper and the amount will remain the same over the term instead of going down as your mortgage balance is paid off.

[QUOTE]Originally posted by Paul Oaks:
[QB] mnrebroker,
The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.
Well...I own a mortgage company as well as my real estate brokerage. Maybe it is different in your state, but most lenders have the waiver escrow built into the rates, which are calculated automatically on our online system. You either check the box for waiver or you don't when funding a loan. "Not telling them about it" is really not an option in the year 2006, when most conforming lending is done paperless.
It has been my experience that the lenders who do not charge the waiver are not the best priced lenders available on the rate sheet.

Not surprised you would say that from a mortgage company perspective. In IL borrowers also have the option of making a deposit into an Interest Bearing Time Deposit Account. That built-in fee is just another way to screw the consumer with a hidden charge. SO tell us from the mortgage perspective what is the purpose behind the fee?
Originally posted by mnrebroker:
[QUOTE]Originally posted by Paul Oaks:
[QB] mnrebroker,
The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.
Well...I own a mortgage company as well as my real estate brokerage. Maybe it is different in your state, but most lenders have the waiver escrow built into the rates, which are calculated automatically on our online system. You either check the box for waiver or you don't when funding a loan. "Not telling them about it" is really not an option in the year 2006, when most conforming lending is done paperless.
It has been my experience that the lenders who do not charge the waiver are not the best priced lenders available on the rate sheet.

Paul, paul, paul...
Mortgage pricing is determined by RISK. From a lender perspective, if the property taxes are not paid, the lender faces risk from the government taking claim on the property. Remember, it is the property that is securing the mortgage, so no lender wants to find themselves in a subordinate position to another entity with a claim on the property. As such, a mortgage is less risky when the lender is collecting property tax escrows because they know the property taxes are paid. Most lenders do charge .250% to waive escrows, although there are a few who do not. This .25% is usually built into the yield spread premium when the LO quotes an interest rate. It does not mean your rate is .25% higher. At most the rate would increase by .125%, if there is even an increase.
The lenders are justified in charging for it because they are taking on additional risk. They also charge a tax service fee to monitor that your property taxes are always paid. I guess the flood certification is also a junk fee. Oh yeah, borrowers shouldn't pay for credit reports either. Appraisal? Who needs that? Everyone knows Realtors price properties appropriately. Get real...

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