Deciding on an Escrow Account after a Refinance

The monthly mortgage dues of a borrower consist of homeowner’s insurance, private mortgage insurance and property taxes apart from the mortgage principal and interest payments. Lenders require that you pay the insurance amounts and the property taxes in an escrow account held by a third party called escrow services. If you settle on a refinance, you will have to decide whether you want to set up a new escrow account for your package.

Purpose of the Account

With the escrow account in place, the lender ensures that you make regular payments of the detailed items. Unpaid property taxes could result in liens. Private mortgage insurance takes care of the lender, should you default on the mortgage. Homeowner insurance serves to protect your home against possible damage. Timely payment of these items with an escrow account helps avoid late payment penalties.

Upon Refinancing

Transfer of an escrow account is not possible, if you refinance your mortgage. The lender will return the property tax and insurance payments of the last installment within 45 days after the refinance.

Setting up a New Escrow Account

Should your lender necessitate you to set up a new escrow account with your refinance package, it will add to the closing costs of the refinance. This may increase your financial burden because the escrow funds from your previous mortgage will not be available to you yet.

If your equity in your home exceeds 20%, your lender will not impose private mortgage insurance upon you. However, you still have to pay the property taxes and the homeowners insurance.

You can request the lender to drop the escrow account, promising to pay the items separately with your monthly mortgage reimbursements. This will reduce the upfront fees at closing, significantly. However, your lender may coerce you agree to a higher interest rate for the refinance to compensate for the risks involved for a possible default on the payments.

Advantages of Escrow Services

Reinstating escrow services after the refinance would make good financial sense in the end because the lender makes available the refinance at lower interest rates. Your monthly mortgage payments over the entire loan term will be lower. The reduced payments will more than compensate for the higher closing costs for including the escrow account. In addition, you do not have to worry about the due date of payment of these items.

Deciding on an Escrow Account after a Refinance

The monthly mortgage dues of a borrower consist of homeowner’s insurance, private mortgage insurance and property taxes apart from the mortgage principal and interest payments. Lenders require that you pay the insurance amounts and the property taxes in an escrow account held by a third party called escrow services....

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