Q: We want to separate our taxes and insurance from our mortgage payment, but our mortgage servicer says no. It did not collect enough to pay our taxes, and now there is a shortage. We want to prevent this in the future. Is the servicing company right? -- Tania
A: Your mortgage lender requires you to escrow your property taxes and homeowner insurance payments so that it can make the annual payments for you. This is referred to as an "impound" account. With this feature, your lender will collect 1/12 of the annual payment each month along with your payment of principal and interest.
Since these expenses sometimes change, there is not always the right amount of money in the account. If the balance goes to low, your lender will ask for more, either in a lump sum or throughout the upcoming year. If the balance gets too high, you will get a refund. Since taxes and insurance rarely decrease, your lender is allowed hold up to an extra two months' worth as a cushion against shortfalls.
This is your money, but it is being controlled by your lender to make sure that these large annual payments get made. Your lender can do this because you agreed to it as a condition of getting the loan. Government-backed loans, such as FHA and VA, will require the creation of an impound account, as will most conventional loans, where the loan balance is more than 80 percent of the value of the home.
Most of the time, impound accounts are a good idea for the borrower because they avoid the necessity of making large outlays. Letting your insurance lapse or not paying your property taxes will put your mortgage in default, possibly leading to foreclosure. Impounds can be thought of as forced savings accounts, helping both the lender and homeowner avoid these sort of problems.
Depending on the type of loan you have, how much you owe, and the value of your house, you may be able to opt out of your impound account by asking your lender. If you do opt out, I strongly suggest that you set up a savings plan and stick to it. I have had to help many homeowners without impounds who suffered a financial blip that led to a large problem with their lender.
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About The Writer
Gary M. Singer is a Florida attorney and board-certified as an expert in real estate law by the Florida Bar. He practices real estate, business litigation and contract law from his office in Sunrise, Fla. He is the chairman of the Real Estate Section of the Broward County Bar Association and is a co-host of the weekly radio show Legal News and Review. He frequently consults on general real estate matters and trends in Florida with various companies across the nation. Send him questions online at www.sunsentinel.com/askpro or follow him on Twitter @GarySingerLaw.
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