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When you own a home, fiscal responsibility goes deeper than just monthly principal + interest payments.
There are taxes and insurance to manage, too.
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The mortgage contract requires homeowners to make 4 payments each month -- principal, interest, taxes, and homeowners insurance -- collectively known as PITI.
Pronounced "pee-eye-tee-eye", PITI is your "housing payment" and failure to make it can have consequence.
As an example, when you don't make your principal + interest repayment, it can invoke your mortgage contract's acceleration clause, resulting in foreclosure.
Or, if you fail to pay your home's real estate taxes and/or hazard insurance premiums, that, too, can result in foreclosure and/or invoke your mortgage's loss payee clause, respectively.
The short story is this : don't miss a payment.
With a conventional loan (i.e. loans through Fannie Mae, Freddie Mac), lenders let homeowners choose how to manage yearly tax and insurance obligations.
You can opt to pay the bills in full when they come due by yourself, or you can choose to pay 1/12 of the annual bill to the lender each month which, in turn, pays the bills for you upon their respective due dates.
The latter method is known as "escrowing" taxes and insurance. The former is known as "waiving escrows".
Waiving escrows is rarely permitted for homeowners with loan-to-values in excess of 80 percent.
Not surprisingly, loan servicers prefer that homeowners escrow. Escrowing taxes and insurance reduces two major lender risks:
Servicers prefer escrows because, in theory, a home’s taxes are always current and the home’s insurance is always paid.
For homeowners with an FHA mortgage, VA mortgage or USDA mortgage, escrowing for taxes and insurance is mandatory. You cannot waive escrows on an FHA loan, for example.
To figure out how much escrows will add to your mortgage payment each month, you may not need a calculator.
Take the sum of the annual real estate tax bills and insurance bills for your homes, then divide that number by 12 months in the year.
As an example, a Bucks County, Pennsylvania home with a $8,400 annual tax bill and a $1,200 insurance policy = $9,600 annually = $800 paid into escrow monthly. These monies are lumped into the "regular" mortgage payment each month, along with the mortgage’s scheduled principal + interest payment.
Most mortgage statements itemize what's being paid into each PITI category for the homeowner's records.
Because escrowed loans are lower risk to lenders, homeowners that choose to escrow tend to get the lowest rate, lowest fee loans. This is the result of lenders charging a premium to homeowners wishing to “waive escrow”. It's a risk compensation thing.
Escrow waiver fees vary between banks, and not all banks will charge them, but the cost can range up to half-percent of the amount borrowed. The larger the loan, in dollar terms, the stiffer the penalty.
Alternatively, waiving escrows can also raise your mortgage rate by up to 0.250 percent.
Not all lenders charge an escrow waiver fee so if you prefer to "pay your own way", tell your lender. Jumbo lenders are most likely to let you waive escrows without penalty.
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator click to get a free, no-obligation rate quote.
You can also find Dan on Twitter and Google+.
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