The Ins and Outs of Mortgage Escrow

Mortgage escrow accounts can be beneficial to homebuyers.

But there are a few things homebuyers should know about them.

First, mortgage escrow accounts are like savings accounts for homeowners.

Money deposited in them is used by a lender to pay your property tax or insurance bill when it is due.

With an escrow account, your lender will pay the bill from the money it collects from you each month.

In turn, you should never pay a bill for these items as long as you own your home and have the escrow account in place.

Borrowers of conventional mortgages, as in those insured by Fannie Mae and Freddie Mac, are typically required to have escrows held back with the payment while the loan balance is greater than 80% of the value of the property.

Federal Housing Administration borrowers will – almost without exception – have escrows taken out of their mortgage payment.

Lenders take a risk when they allow you to pay your own taxes and insurance.

If you default on your mortgage payment, you are also defaulting on the money that goes into the mortgage escrow account.

Property taxes collected at closing will vary from state to state.

Some states collect taxes in arrears, meaning that taxes for 2010 will be due sometime in 2011.

In other states, taxes are paid in advance of the time period they cover.

The time of year a closing takes place may make a difference as to how much you may need at the closing table, as some taxing bodies have installments due in different parts of the year.

It is best for homebuyers to check with a tax professional for details in their area.

What You Need to Know About HomePath Properties

The HomePath program has been getting a lot of attention lately. So what is it, and what can it do for you?

HomePath is a website owned by Fannie Mae that shows properties that have been foreclosed on and taken back from the owners. These are often referred to as real estate owned (REO) properties.

These properties can be in very good shape or in need of major repairs. They are often heavily discounted in price. Keep in mind, though, that whatever their condition, they are all sold as is.

Some disclosures state that anything needing attention once the closing is complete is on the shoulders of the buyer. In other words, once you own it, you own it. On the financing end, the good news is that for those who qualify, and many people do, there is no mortgage insurance required, even with down payments as low as 3.5%.

There are also no appraisals or surveys required, meaning that closing costs are lower than they would be on a traditional mortgage, as these items can cost $300 to $500 each. The mortgage rate will be slightly higher on a HomePath loan than on a traditional mortgage. That’s because Fannie Mae charges a premium to offset the fact that there is no mortgage insurance.

Plan on allowing 30 days to get to the closing table once you apply. HomePath loans are considered specialty products, and while they don’t need to go to Fannie Mae to get approved, there are only a handful of lenders that actually handle these types of mortgages.

For more information on HomePath, visit

Adjustable Rate Mortgages: What You Must Know

With the record-low interest rate environment that we find ourselves in these days, adjustable rate mortgages (ARMs) seem to be more attractive than ever. After all, ARMs often have lower rates than their fixed rate counterparts.

However, there are a few things that buyers should take into consideration before getting into an ARM.

ARMs have a fixed period in the beginning of the loan.

The lower-rate mortgages are usually the ones with the shorter initial terms.

Rates will fluctuate with indices such as Treasury bills, or the London Inter-Bank Offer Rate (LIBOR), which is the interest rate that banks charge each other for loans.

ARMs adjust only at specific intervals, such as once per year, and rates can change only a certain amount at each interval.

They have what are called floors and ceilings.

One of the biggest misconceptions people have about ARMs is that, because the rates are low, they only need to qualify for the initial rate.

This is no longer the case.

For example, if you are looking at a mortgage with an initial rate of 3.5%, but it has a ceiling or lifetime high rate of 9.5%, you will now need to qualify for the payment as if it were 9.5%.

This accomplishes a couple of important things.

First, it takes the guesswork out of wondering whether or not you will be able to handle the mortgage payment if it spikes, based on your current income.

Second, it also protects the lender in the event that the property loses significant value and you are unable to refinance to a lower rate due to equity issues.

Two Different Ways You Get Mortgage Money

If you’ve ever applied for a mortgage, or are planning to do so soon, you should be aware that there are a number of ways lenders and clients connect with one another.

First, lenders reach you by way of channels. There are two basic channels. The first is the retail channel, while the other is the wholesale or mortgage broker channel.

The retail channel is just as it sounds. You may walk into a branch of a bank, fill out an application and the entire mortgage process happens under one roof.

When you go to the closing table, the money you get from the lender, to either give to the seller or pay off your old mortgage company in the case of a refinance, comes from the bank’s own funds.

The broker channel is different.

Mortgage brokers, just as the name implies, broker out loans from their clients to different lenders. The processing of the loan, depending on the arrangement between the broker and the lender, will often be handled at the broker’s office. When it comes time to go to the closing table, though, the money will come directly from the lender, versus the broker.

It is possible that a lender like a big-box bank will operate both channels simultaneously, and those separate channels will compete against one another for your business – either directly to you or through a broker. This is good for you as a consumer, because you have options when you shop for a mortgage.