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.
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If you decide not to waive the escrow, be sure to ask WHEN they pay the property taxes. Where I live, we have until January 31 to pay without penalty but if they are not paid by Dec. 31 you have to wait until the following year to deduct them from your taxes. My lender did not pay the taxes before Dec. 31 so I missed out on my deduction the first year. If a buyer is counting on that deduction in the first year of purchase, he/she would be wise to establish when the lender will make the payment before agreeing to the escrow account (or plan accordingly).
Harry Sit says
Marcia – Thanks for the caveat. Unfortunately I’m not able to deduct property tax no matter in which year it’s paid. It’s still a good point for others though.
Clare McCright says
Property taxes and home/hazard insurance are higher in my state. I was told that it was a Freddie Mac rule that I must pay a .5% “fee” for the escrow waiver. That’s significantly higher than you indicated. Have I been misled?
Harry Sit says
Clare – I don’t know if it’s a Freddie Mac rule or not. If the fee is too high, just decline the escrow waiver and do the escrow. You will have to pay the property taxes and hazard insurance anyway. It’s just a matter of paying them every month versus paying them a few times a year. I cannot justify paying someone a hefty fee just to waive escrow.
I looked at the calculator you setup. The breakeven calculation doesn’t consider the time value of money (compounding nature of interest). Wouldn’t that change the years required to hit the breakeven point? Additionally, it doesn’t consider any changes in the interest rate over time. Given the potential increases in interest rates that we may see over the next year (2010), the analysis should allow a user to estimate changes in interest rates.
Harry Sit says
Rob – I agree with you on both points. I didn’t go too fancy on this back-of-envelope calculation. At low interest rate for a few years, the time value of money won’t change the result much. Instead of 4.4 years without time value of money, you may get 4.5 years with time value of money. For the interest rate changes, you can enter an expected average interest rate in the cell for “Interest rate in your own account” which is higher than the actual interest rate right now.
Should I expect any additional escrow charges — at closing — in addition to prepaying property taxes and insurance for the first year plus 3 months?
Doesn’t escrow usually charge also monthly service fees?
Would it be beneficial to waive the escrow even when the bank wants to charge $520 fee (0.25% on $208,000 loan). I can get annual interest of 2.75% on a checking account..
Harry Sit says
@Evie – I’ve never seen any charges for using an escrow account at closing nor any monthly service fees. I don’t think paying the escrow waiver fee is worth it but you will have to see if it’s worth it for you. First thing to find out would be if your state requires the bank to pay interest to you on the escrow balance.
Ok…I’m a little late to this party but found this website in searching for Escrow Fees and interest.
I’m re-fi’ing right now. I don’t pay escrow and have paid my own taxes/insurance on my own for the last 8years (my original lender did not care if I wanted to set up escrow or not – 100% financing loan).
Anyway, this new lender wants to set up escrow on my Freddie Mac loan – I told him no and he said it was a Freddie Mac rule – Well I just looked it up on Freddie Mac’s web site (Freddie Mac Guide – Guide Section 59.1.escrow). There is NO requirement to have a escrow in various scenario’s, including mine (HARP Re-Fi). I also did not read anywhere about any fee’s or percentages, etc…so some previous people got lied to!!
Guess I’m learning too….these “Mortgage Loan specialists – with their Mortgage loan specialist numbers” don’t always know what they are talking about.
I’m about to close on another home and I’m choosing to not set up an escrow account. In my current home I have paid the taxes and insurance at the end of the year for over 15 years. I like the idea of having a lower monthly payment for 11 months of the year. Some months we spend more than others so the extra funds help. Although I know I will have the big one at the end of the year, it is worth it to me to pay the $360 at closing to have that flexibility during the year. But it takes “financial discipline” to ensure that those months when we have those funds available, those monies are placed in the account set up for insurance and taxes.
IS not it all depends on different factors of the loan for example LTV, Scores and the loan program which will determine the escrow account requirements.