Can someone please elaborate the advantages and disadvantages of impounding or compounding property taxes?

The advantage to an escroll account for taxes and insurance is that the money is set aside every month for the annual payment. The advantage is for the lender so that they can make sure that those items are paid to protect their investment. The wonderful thing is that because they call it an escroll and not a draw account they do not pay interest on the balance. The advantages are all for the lender. I have one small local savings and loan that that I work with. They never sell the service on the loan and if you have 20% down they don't require an escroll account. The intrest that you can earn on the taxes and insurance money is small compared to your loan but at least it is something.

Wow impressive Ohio Realtor. (Man I was pulling for those Bengals yesterday )

Most all lenders consider escrow optional if your LTV is under 80%. The prime conforming Fannie Mae and Freddy Mac products typically mandate escrows over 80%. You only have a choice to waive if under 80% and it typically cost's the borrower .25% of the loan amount.

One other note is escrow dispursements are made every 6 months so the lender or escrow company has time to invest that money and make a profit.

Most non-conforming lenders either do not have escrow or offer it but it typically is never mandated.

NEVER escrow taxes and insurance unless the lender absolutely requires it. If so make sure you have in writing exactly what must be done for that requirement to be dropped.

You are much better off making that monthly T&I payment into your money market account and paying your T&I from that account.

Why let the bank use your money for Free! They are not letting you use their money for Free!

Great advice! For those who do not know Money Market accounts are liquid as in you can withdraw like checking but sometimes they place a max # of times monthly. For example mine allows 4 free withdraws per month.

These accounts pay you interest from 1-5%

They also usually have a minimum $ amount that you can write a check. Mine is $250.

500 here. Thanks for adding that. Good info to prepare you for what to expect.

As a LO, I always tell my clients not to escrow. The main reason is because it can significantly raise their closing costs. The lender has to fund the escrow account and depending on when taxes are due in your area, it could be anywhere from 2 to 12 months worth of taxes which can result in thousands of extra dollars they need to bring to closing.

I have found my more financially savvy borrowers prefer to pay their taxes on their own, while some borrowers prefer the forced savings of escrowing. There are many people who simply forget that they have to pay property taxes and it is easier for them to pay in little pieces each month than writing a big check twice per year.

Very true! Some are just very forgetful and think most counties just take them semi- annually (Ohio). Some of them allow monthly payments even. Possibly direct withdraw and a discount.

People definitely need to be careful with not escrowing. I personally don't escrow on my properties and advise that as well to my borrowers, but it really needs to be pushed for people to discipline themselves to set aside the money each month as if it was included in their payment. Too many times I have seen people not plan correctly and now it's tax time and they're in trouble. Now they end up taking cash advances from credit cards and other means to pay for the taxes, which surely defeats the purpose.

The predominant advice is to not escrow. Let's see...

The lender charges a quarter point to waive escrow...and on a half a million loan, that is what...$1250? Say the taxes are 4 grand and the insurance another 1500.00...and you start with a third of that in escrow....and let's say it averages 2250 at all times...because RESPA (roughly) says the escrow needs to get (equivalent) of under a hundred bucks at some point in the year.

At the money market rate of 3% your return is $67.50 per year...so the payback on not escrowing is 18 years, plus the hassle of making the payments. Hmmmm. Not sure my math is right...obviously will change depending on tax rates, etc...but I hope I am communicating the idea.

Now...I don't want to and won’t argue the math...all I am saying is that you should do the math every time and then decide to escrow or not. Rarely do people keep mortgage products for 18 years anymore...and the statement to NEVER escrow might be premature, depending on the conditions and pricing of the loan.

mnrebroker,

The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.

I still say never escrow and definately Never take that that worthless credit life if offered. If you want that kind of protection then call your life insurance agent and get a 15 or 20 year term policy. Coverage will be cheaper and the amount will remain the same over the term instead of going down as your mortgage balance is paid off.

[QUOTE]Originally posted by Paul Oaks:
[QB] mnrebroker,

The lender will only charge a quarter point if you fail to say anything to them. If they insist then get a new lender and a new loan.

Well...I own a mortgage company as well as my real estate brokerage. Maybe it is different in your state, but most lenders have the waiver escrow built into the rates, which are calculated automatically on our online system. You either check the box for waiver or you don't when funding a loan. "Not telling them about it" is really not an option in the year 2006, when most conforming lending is done paperless.

It has been my experience that the lenders who do not charge the waiver are not the best priced lenders available on the rate sheet.

Not surprised you would say that from a mortgage company perspective. In IL borrowers also have the option of making a deposit into an Interest Bearing Time Deposit Account. That built-in fee is just another way to screw the consumer with a hidden charge. SO tell us from the mortgage perspective what is the purpose behind the fee?

Paul, paul, paul...

Mortgage pricing is determined by RISK. From a lender perspective, if the property taxes are not paid, the lender faces risk from the government taking claim on the property. Remember, it is the property that is securing the mortgage, so no lender wants to find themselves in a subordinate position to another entity with a claim on the property. As such, a mortgage is less risky when the lender is collecting property tax escrows because they know the property taxes are paid. Most lenders do charge .250% to waive escrows, although there are a few who do not. This .25% is usually built into the yield spread premium when the LO quotes an interest rate. It does not mean your rate is .25% higher. At most the rate would increase by .125%, if there is even an increase.

The lenders are justified in charging for it because they are taking on additional risk. They also charge a tax service fee to monitor that your property taxes are always paid. I guess the flood certification is also a junk fee. Oh yeah, borrowers shouldn't pay for credit reports either. Appraisal? Who needs that? Everyone knows Realtors price properties appropriately. Get real...