Inaccurate Mortgage Payment Estimates with Taxes and Insurance
A standard mortgage payment is often quoted by a mortgage lenders with either just the principal or interest portion of the monthly payment or the principal and interest as well as the monthly allotment for taxes and insurance. The terms used by the mortgage industry for these monthly mortgage payments are referred to by a couple of acronyms. PI is used to refer to the principle and interest payment and PITI is used to refer to the full payment of principal, interest, taxes and insurance.
When the mortgage lender is quoting a payment that includes the TI or taxes and insurance portion of a monthly mortgage payment, this number is frequently just and estimate and is often inaccurate.
Miscalculating the monthly amount of property taxes or insurance is generally not intentional. When a potential home loan borrower first calls a mortgage lender for a mortgage rate quote, a common question is what the monthly payment will be. It is fairly easy to provide a mortgage payment amount based on the loan amount, the mortgage rate offered by the mortgage lender and the term of the loan. In fact, with these figures, an exact mortgage payment can be calculated that includes principal and interest. Now when it comes time to quote the payment with taxes and insurance, the mortgage lender has to rely on an estimate of these figures based on the property value and location or use figures that are provide by the borrower.
In either case, the PITI monthly payment that is initially quoted is generally going to be an estimate that has quite a bit of room for error. This error amount is magnified in the current low mortgage rate and high property tax period.
As an example, a home in Naperville Illinois worth $500,000.00 will have a property tax bill of $12,500.00 ( approximately ), with a 20% down payment the loan amount would be $400,000, with mortgage rate of 4.50% the monthly mortgage payment would be $2,026.74. This is the principal and interest portion of the monthly mortgage payment. By dividing the annual taxes of $12,500.00, the tax portion of the monthly mortgage payment is $1,041.67. If the annual home owner’s insurance bill is $775.00, the insurance portion of the monthly bill would be $64.58. This puts the total PITI payment at $3,132.99. Of the total PITI monthly mortgage payment, almost 35% of the payment is for taxes and insurance.
Exact property taxes are typically available only through public records or through tax data published in a local multiple listing services. Once the mortgage loan request is being processed, the mortgage lender will have a more exact figure on the real estate taxes based on information retrieved form the county tax offices.
The same issue of inexact figures applies to hazard insurance or home owners insurance. The exact number for the insurance costs will come from the insurance company not the loan officer or the borrower. In the meantime, the figures that used in the initial calculations are just estimates.
Escrow accounts, sometimes called impound accounts are deposit accounts established by the mortgage lender to pay annual property tax bills and insurance premiums. The escrow amount is initially set up with approximately 1/6 of the annual real estate tax bill and 1/16 of the annual insurance bill. The cost or amount of money needed to fund the escrow account will impact the amount of funds need at the loan closing.
If the insurance policy and / or the property taxes are misquoted, it can be quite a shock when the mortgage borrower arrives to the loan closing and has to come up with more funds to cover changes in the escrow account and more importantly, discover for the first time the actual monthly mortgage payment including PITI is significantly higher than thought based on that first mortgage payment quote they received.
To avoid these surprises, pay attention to the numbers. When a mortgage lender quotes a payment, understand what is covered in that mortgage payment. Is it the mortgage payment PITI or just the PI and further recognize how these numbers were calculated. Check the results with a mortgage calculator for the term and mortgage rate and go the extra step to verify the tax payment amount and insurance costs.
Mortgage Servicing
A mortgage servicer is a company responsible for collecting the monthly mortgage payments, disbursing the taxes and insurance if necessary and crediting the balance to the borrower’s mortgage loan account. The company that handles the mortgage servicing may engage in this activity for another mortgage lender or the company may be servicing the mortgage loan for their own portfolio of home loans.
The mortgage loan servicer receives a fee from each loan for the payment processing involved in servicing that loan. The fee is usually a percentage of the payment on the loan. Approximately ¼ of one percent is the standard fee for mortgage servicing. But the service fees will depend on many factors including the mortgage loan type. Fixed rate mortgages generally pay the smallest servicing fee followed by adjustable rate mortgages and then FHA loans and VA loans. Generally, the more work to do as servicer such as collection calls and notices the greater the servicing fee.
Often a home loan will have its servicing sold shortly after the mortgage loan closing. A home loan may in fact, have its servicing rights sold multiple times over the life of the loan. If your home loan is about to have its servicing sold or transferred to another company, the new servicing company must notify you within 15 days after the transferred occurred. Within the notice, the new servicing company must notify you of:
The new mortgage servicer’s name and address.
The date that your old servicer will no longer be able to accept payments.
The date this new servicer will begin accepting the monthly mortgage payments
A toll free phone number for the new servicer.
If you have optional insurance coverages, the terms to continue must be spelled out.
A statement will be included that clarifies there is no changes to the terms and
conditions of your original home loan and mortgage.
If your home loan has an escrow account, the servicer is required under the RESPA statute, to send an annual statement that illustrates the activity of the escrow account. The statement will show the account balance for the escrowed funds and reflect the payments made for property taxes and insurance over the prior 12 months.
New mortgage loan servicers are not allowed to require an escrow of taxes and insurance if the terms of the original do not call for an escrow.
After the servicing of a loan is transferred there is a 60 day grace period that bars the servicer from charging a late fee should the borrower inadvertently send their mortgage payment to the previous servicer or mortgage lender.
Usually the transition from mortgage loan servicing company to another goes smoothly, but errors do occur. It is always a good idea to check to make sure that the existing mortgage lender is selling the loan or the servicing rights and when they received your last payment. Then, check to see when the next monthly mortgage payment is due and to which address that payment should be sent.
Should you have a complaint regarding the servicing of your home loan, notify the servicer in writing of the complaint with as much supporting documentation as possible. Under RESPA regulations, the servicer has 20 business days from the time they receive your complaint to acknowledge the dispute and 60 business to settle the dispute. If you are not satisfied with the resolution and wish to file a complaint with Department of Housing and Urban Development, the contact location for such a complaint is:
Department of Housing and Urban Development
451 Seventh St. SW Room 9154
Washington, DC 20410
Q. A large part of my monthly mortgage payment is the tax and insurance escrow, how is this account established?
A. An escrow account or sometimes referred to as an impound account, is established by a mortgage lender to collect and disburse tax and insurance payments. It is the mortgage lender’s decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. However, most all mortgage lenders require an escrow for loans that have less than a 20% down payment or a loan to value in excess of 80%. Certain government mortgage loan programs and secondary market sales of home loans will often require escrow accounts as a condition of the mortgage loan as well.
Mortgage lenders set up the escrow account to receive monthly payments from home buyers to then in turn pay for these obligations as they come due on the items such as annual insurance premiums, real estate taxes and assessments.
Mortgage escrow accounts work something like a forced savings account for the homeowner’s tax and insurance bill. The money to pay the annual property taxes or semiannual or in some cases, quarterly property taxes is deposited and saved in the escrow account that is managed by the mortgage lender or mortgage servicer and then disbursed by the mortgage lender on or before the tax and insurance due date. The money that is accumulated or deposited in the escrow accounts comes from a portion of the monthly mortgage payment made by the home loan borrower.
There are regulations that limit the maximum amount of funds that a mortgage lender can require a borrower to maintain in an escrow account. During the term of the home loan, RESPA rules prohibit a mortgage lender from charging excessive amounts for the maintenance of an escrow account. Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a mortgage lender may require the borrower to hold in an escrow account for the payment of taxes, insurance, etc. RESPA rules also require that the mortgage lender provide initial and annual escrow account statements.
The amount that needs to be placed in the escrow account initially and the amount of the monthly payments are determined by the cost of insurance and a tax assessment of the property. This amount will often fluctuate each year as insurance premiums rise or maybe fall and property taxes rise or may fall.
Each month the mortgage lender may require the home loan borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the mortgage lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year.
The mortgage lender is required to perform an escrow account analysis once during the year and notify the home loan borrowers of any shortage or excess funds ion the escrow account. Any funds held in excess of $50 or more must be returned to the borrower.
The process for calculating the mortgage escrow account starts with all the payment amounts or disbursements that will be paid out of your escrow account. This is usually the property tax bill and homeowner’s insurance bill. This total amount of insurance and taxes and other assessments if they apply are totaled up and divided by 12 monthly payments.
A trial running balance can then be calculated for the next 12 months listing all the monthly payments into the escrow account and all payments that the mortgage lender will pay out of the account when they are due. From this point, there is generally a time when the escrow account would reach a negative balance. In other words, when the first tax payment comes up there will likely not be enough money in the escrow account by simply adding then previous month’s monthly payments.
The next step is to increase the amount of money deposited so that all the monthly balances in the account, including the lowest point in the account, is at least zero so there is never a negative balance.
Finally, a reserve is added by the mortgage lender which may be added to the monthly balances. The escrow reserve amount may be a maximum of 1/6 of the total escrow charges.
When there is a deficiency in the escrow account which occurs because the mortgage lender has to use their own funds to pay a one of the disbursements, the home loan borrower will have to reimburse the mortgage lender. When the deficiency is less than one monthly escrow payment, the home loan borrower may have to repay the mortgage lender by adding to the next monthly payment to make up the deficiency in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the mortgage lender may require the home loan borrower to repay the amount over a period of 2-12 months.
The annual escrow account statement summarizes all escrow account deposits and payments during the mortgage lenders or servicer’s twelve month computation year. The annual escrow account statement also notifies the home loan borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.