Last week was week 3 for my mortgage refinance. Here’s what happened in week 3 with a brief recap for week 1 and week 2:
Week 1. Found a good rate. Filled out application.
Week 2. Locked rate. Signed disclosure documents. Faxed supporting documents.
Monday May 4, 2009. An appraiser came and did an appraisal. I didn’t have to do a full appraisal in my last several refinances. Last time the broker paid $100 appraisal waiver fee (cheaper than a real appraisal). Before that, they did a "drive-by appraisal," just verifying the house was standing. This time the lender insisted on a full appraisal. Either the lenders are more cautious than before or it’s a mandate from Fannie Mae. No biggie. It just adds an extra step to the process.
I also had to decide last week whether I want to do the impound aka escrow account for my property tax and homeowner’s insurance. The alternative is to pay an extra fee and have them waive that requirement. Lenders prefer that the borrower pays property tax and homeowner’s insurance into an impound or escrow account. That way they will make sure the tax and insurance bills are paid. It protects their interest. They also earn some float from the money. My loan advisor told me Fannie Mae charges them a fee if the loan does not have an escrow. They are passing that fee down to me.
Most people if given a choice probably will not use impound or escrow account because it unnecessarily complicates paying the tax and insurance bills. But if you have to pay a fee to get rid of annoyance, you have to decide if the fee is worth it. You can try to negotiate away the escrow waiver fee. At the same time, if you are also able to negotiate an additional credit in lieu of the escrow waiver, you are still effectively paying the fee because you give up the additional credit.
From a lost interest point of view, paying a fee to waive the escrow is not a good deal right now. The interest rate is very low. In some states you actually earn a little bit of interest in the escrow account, which to some degree offsets the lost interest. I made this break-even calculator
It shows it will take several years to earn back the fee from the lost interest.
I also learned I will have a good chance to get the escrow waived after the loan is sold. It depends on who ends up servicing the loan. Some servicers will close the escrow account upon request if the loan-to-value ratio is sufficiently low. I decided to take my chance after the loan is sold. I will do the escrow and pocket the escrow waiver fee.
The loan advisor warned me that the money I must bring to the table at closing will be higher if I don’t waive escrow, because they have to collect a few months of tax and insurance as cushion for the escrow account. I’m OK with that because that amount is a cash outflow, not a cost.