07/15/09: Escrow For Taxes
By: Benny L. Kass
Q: I am a senior citizen who is literally being priced out of my home of 10 years due to the consistent shortage of my escrow account. I asked my lender to allow me to pay my own taxes and insurance, but that request was denied. The lender said that although they understand my desire to establish payment of property taxes on my own, it is their policy to maintain an escrow account on all loans where an escrow account was required at the time of closing.
My issue is not having an escrow account. My issue is that every year I am faced with an escrow shortage which affects my monthly mortgage payments. Why does the mortgage company routinely estimate my escrow account too low? Property taxes go up every year and they obviously are not collecting enough money; otherwise, there would not always be a shortfall. And, what I also don't understand is if I have paid the entire escrow shortage, why is my monthly mortgage payment being increased as well?
A: There are two reasons why I do not like the idea of having to give a lender 1/12th of my annual real estate and insurance bill. First, most lenders do not pay interest on these escrowed funds, but clearly have the use of the money for a good part of the year. Second – and perhaps more importantly – I have had too many clients whose lender either did not pay the real estate tax at all or was late in making the payment.
Many years ago, I was successful in getting the law in the District of Columbia changed, so that if you get a loan of 80 percent or less of the purchase price of the house, you have the absolute right to pay your own real estate taxes and insurance without escrow. And lenders have no right to increase the interest rate if you decide not to allow the escrows.
But that’s not the law in Maryland or Virginia. Lenders do have the right to escrow for taxes and insurance. In fact, you may have heard lenders talk about PITI – which means your monthly payment includes (1) principal, (2) interest, (3) taxes and (4) insurance.
In your situation, while I understand your concerns, I cannot agree that your lender is pricing you out of your house. Unfortunately, it is the real estate tax that you have to pay – whether directly or through escrow – that is causing you pain.
Instead of trying to fight your lender – which probably won’t work – I suggest that you determine the amount of your real estate tax (and insurance if applicable) and budget this on your own. If, for example, you know that 1/12th of your next real estate tax bill will cost you $100, but if you are only sending your lender $80 for escrow, put aside that extra $20 into a savings account. At the end of the year, if the lender comes up short, you will at least have the money to pay the deficit.
In response to your second question (why your monthly payment increases), it is my experience that if a lender is short on the escrow amount, the borrower has two alternatives: pay the arrearage and the monthly payment will increase slightly due solely to the tax increase, or have the arrearage spread out over the next twelve months. In that case, not only will your monthly payment go up by the amount of the tax increase, but will further increase based on the 12 month allocation.
Additionally, you should check with your local taxing authority. Many state and counties (including the District of Columbia) have programs whereby senior citizens under certain income limitations, can get a break on the amount of the real estate tax they have to pay.
– Boilerplate –