A compromise for waiving your escrow reserve account

An escrow reserve account is used to collect and “reserve” the real estate taxes and home owners insurance portion of your monthly mortgage payment for when your taxes and insurance bills are due. In Washington state, property taxes are paid twice a year and home owners insurance is paid annually.

If you have enough equity (80% loan to value or lower), a lender may permit a home owner to pay taxes and insurance are their own and not have them included in their monthly mortgage payment. Lenders typically charge 0.25% in fee if a home owner elects to do this. On a $400,000 loan amount, this is a cost of $1000. This fee is often priced into the cost of the rate. It’s not unusual for a home owner to be unaware they paid this fee since it is most often already factored into the cost of the interest rate.

However there is a compromise of sorts. Did you know that many lenders will permit a home owner to pay their home owners insurance and not charge a 0.25% escrow waiver fee? This is possible when property taxes are still included in the monthly mortgage payment and the property has an 80% loan to value or lower.

If you are considering buying or refinancing your home located anywhere in Washington, I’m happy to help you.

Fannie Mae and Freddie Mac improve HARP 2.0 Underwriting Guidelines

On Friday, Fannie Mae and Freddie Mac announced much needed updates to underwriting guidelines for HARP 2.0. The Home Affordable Refinance Program (HARP 2.0) has helped many Washington state homeowners with conforming mortgages (securitized by Fannie Mae or Freddie Mac prior to June 1, 2009) take advantage of historically low mortgage rates regardless of their home’s current equity (or lack thereof). You can learn more about the HARP 2.0 program by clicking here.

The recent updates to HARP 2.0 will allow more home owners to have access to this program by reducing documentation requirements for some borrowers. Here are some of the improvements:

  • Reduced documentation for income and assets. NOTE: Form 4506 and verification of employment will still be required. Lenders will not be required to verify large deposits.
  • Allowing borrowers with assets to not have to document income. This is available when a home owner has at least 12 months of their proposed new mortgage payment (PITI) in savings. The assets may come from checking or savings, stocks or vested retirement accounts.
  • Improvements to when a borrower is removed from the mortgage. Previously if a borrower was being removed with the HARP 2.0 refinance, guidelines required proof that the remaining borrower made the mortgage payments for the last year with their own separate funds (except in the case of death). Now with HARP 2.0, in the remaining borrower can qualify on their own (debt to income at 45% or lower and credit scores of 620 or higher) they may qualify for a HARP 2.0 refinance.

Remember, banks and lenders may layer their own underwriting guidelines to Fannie Mae and Freddie Mac’s HARP 2.0 program.

If you have been turned down for a HARP 2.0 refinance before, it may be worth checking with your local, licensed mortgage originator to see if you are now eligible. HARP 2.0 is available for owner occupied, vacation homes and investment properties.  I can help you if your home is located anywhere in Washington State – click here for your HARP 2.0 rate quote.

How Long Will PMI Stay on my HARP 2.0 Mortgage?

This is a question that I’m often asked by Washington  home owners who are considering refinancing their current conventional mortgage using the HARP 2.0 program. The answers I’ve received from private mortgage insurance companies vary from “it’s up to the mortgage servicer” to “when the new loans principal reaches 78% loan to value”.  

If your current loan to value is triple-digit because of being underwater, the thought of paying private mortgage insurance for years may not sound appealing. Here are some points I encourage my clients to consider:

  • determine when your existing private mortgage insurance is set to terminate. If it’s before December 2013 (assuming the HARP program is not terminated early, which Fannie and Freddie have reserved the right to do) you could consider delaying your HARP refi so that you won’t have PMI on the new loan.
  • compare your existing principal and interest payment (excluding the private mortgage insurance) to the proposed HARP payment including principal, interest plus mortgage insurance.  Many of my clients are saving hundreds of dollars each month – even with keeping their mortgage insurance.
  •  consider how long you plan on keeping your home and what your alternatives may be. If you are underwater and are planning on staying in your home or eventually converting it to a rental property, reducing your payment now may be beneficial. If you are planning on doing a short sale, then refinancing at this time would probably not pencil out.

With HARP 2.0 refinances, when you have private mortgage insurance, most pmi companies are transferring the pmi certificates over to the new lender without any issues. The pmi rates stay the same so if you’re currently paying private mortgage insurance monthly, you can estimate that the new pmi payment will be roughly the same with your new mortgage payment.   

If you have lender paid mortgage insurance, often times it was paid for upfront and there will be no private mortgage insurance for the home owner to pay. Sometimes the lender paid mortgage insurance (LPMI) was being paid monthly by the lender and in those cases, the pmi company may convert the policy to “paid monthly” so the borrower can assume it.

If you’re interested in a mortgage rate quote for a HARP 2.0 refinance for your home located anywhere in Washington state, contact me.

Can I Pay My Own Taxes & Insurance?

Mpj034188500001Unless you have 20% or more of equity in your home, chances are you have an escrow account (also referred to impounds or reserves) for your home owners insurance and property taxes.   Lenders want to make sure that they reduce risk by requiring taxes and insurance to be included in your monthly mortgage payment.  Property taxes are one of the few items that can take precedence over lien position in the event they were to not be paid.   Your first mortgage wants to stay just that, a first mortgage (in the event of a worse case scenario, foreclosure). 

A few years ago, there were a few lenders (subprime) who were providing 80/20 mortgages (100% financing) and not requiring that taxes and insurance be included in the payments.   This was a disaster.    A majority of these borrowers did not plan for the huge tax bills (on a $350,000 valued home, taxes would be roughly $4,375 annually) even though they had the best intentions of doing so.

Having your taxes and insurance included in your mortgage payment is actually very convenient.  Instead of having to pay an annual insurance premium and half of your annual taxes on April 30th and the second half on October 31st, the lender establishes an automatic savings plan for you. 

In addition, most lenders charge a fee when you pay your own taxes and insurance (or waive your reserve account).   Typically, the fee is 0.25% of the loan amount.  For example, on a $250,000 loan amount, the fee is $625.00 of additional cost. This can either be charged upfront as an escrow waiver fee or may be priced into the interest rate depending on pricing when the loan is locked.   The most it should impact the rate would be by approx. 0.125%, which is about $20.00 more per month on a $250,000 loan.    So you may be getting better pricing having your taxes and insurance included in the mortgage payment.

The amount of reserves the lender requires varies depending on the closing date of the new mortgage.  Property tax reserves are based on what month your first payment is due and interest on the new mortgage is prorated to the day of closing. If you’re buying, 14 months of home owners insurance is collected.  If  you have a condo, the lender does not collect home owners insurance (but you should check into insurance for your belongings).

In my opinion, the only time it makes sense for home owners to not have their taxes and insurance included in their mortgage payment is when they are savvy investors who are going to earn enough interest in a short period of time (remember, taxes are paid twice a year) and still come out ahead of the costs (possibly 0.25% of the loan amount).  Even if you have 20% or more equity in your home, I don’t recommend waiving your reserve account.   

NOTE:  This information is intended for properties in Washington State.  Check with your Mortgage Professional to see how impounds are treated in your specific state.

If you would like a rate quote for your home located in Washington, with or without reserves, click here.