Finance Globe

U.S. financial and economic topics from several finance writers.
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Causes for Change in Your Escrow Payment

Escrow payments will occasionally change.
If your house payment consists of PITI (principal, interest, taxes, and insurance), then part of your monthly payment is going into an escrow account. Accurate escrow payments ensure that taxes and insurance are properly budgeted for. The amount of the escrow payment can change if you or the lender realize that too much or too little is being collected for those expenses. The escrow payment can also change if the property tax bill or insurance premiums change for various reasons.

Property Tax Assessment
Property taxes are assessed locally, usually by the town or county of residence. Most jurisdictions only reassess for taxes every few years or so, and different locales use different methods to calculate the property's assessed value. Market value is often used, but in many areas the tax value is a little less than the market value. Some locales set the tax value of the property by how much it would cost to rebuild it.

Real estate values tend to keep up with the pace of inflation, so reassessments under normal circumstances would typically be in-line with current inflation rates. But it is also possible for the assessed value of a home to go down, as evident with current real estate market conditions due to the nation's sub-prime mortgage disaster. Some communities have already responded by reassessing properties to a more realistic value since the bust, saving homeowners money on taxes.

The assessed value of your home can also change if you make improvements to your property, such as adding onto your home, or building an extra garage or workshop. Your property may be reassessed soon after someone notices that you got a building permit for improvements that will increase the value of your home. Or they may just come out to reassess when they normally would, but you can be pretty sure that many types of property improvements will cause your taxes to go up eventually.

First owners of a newly-built home should be prepared for a significant increase in their tax bill within a year or two after purchasing the home. At closing, the tax payments are likely to be for only the empty lot. The tax assessor will come out sometime after you close on the home, possibly within months in some areas or up to two years later, and assesses the property with the newly built home on it. You'll then have to start paying full-priced taxes.

I was the first owner of my house, and my tax payments to escrow were only $30 a month at the closing table. About 18 months later, I received a tax assessment from the county. My escrow payment for property tax shot up to about $200 a month. I was prepared for this big increase in payment since the lender warned me about it at closing; at least I got away with such a cheap tax payment for a little bit.

Appealing a tax assessment is possible if you believe your home was overvalued in the assessment. The first step is to know how the tax assessor comes up with the values of homes. The next step is to know why your home should be assessed lower than it is. Then you'll need to understand and follow through with the tax assessor's process to appeal the assessment. It will take time out of your day and, likely, some money out of your pocket, but you can save a lot in the long run if your home's assessed value truly is too high.

If your home is worth significantly less than the others in the area, you may have a case worth fighting for, especially if you plan to stay in your home for a long time. On the other hand, a reassessment due to an appeal may be done more thoroughly than a routine assessment. This may mean that the assessor may notice qualities about your property that they didn't notice before. It is quite possible that your assessed value may go up even higher, and you could be facing an even larger property tax bill.

Property Tax Rate Change
Sometimes escrow payments increase because the rate of property tax has been increased. Officials may raise property tax rates to pay for city or county improvements, or if they need additional funding for schools, police and fire departments, parks, community events, and other services provided at the local level.

And though it seems to happen less often, it's also possible for tax rates to go down if your locale finds that they have a surplus of funding for those needs. States may also pass legislation for property tax relief that reduces the homeowner's total tax bill, and the amount that must be collected in escrow.

Hazard or Flood Insurance Premium
Your homeowner's insurance premium can go up for different reasons. You can expect a higher annual premium if you drastically improve your home, thereby increasing its value and replacement cost. You would need to notify the insurance company of the improvements, so you should be aware of how much of an increase you're going to pay when you talk to them. The mortgage company should eventually find out about the increase, but give them a call right away to ensure that there isn't a shortage in escrow when the premium is due.

Your insurance premium may also go up if you later have possible hazards on your property, such as adding a swimming pool, trampoline, play-set, or a breed of dog with a reputation for bites. And just the same, it may go down if you later cease to have those hazards on your property. So give the insurance company a call if you someday decide to fill in your pool or your beloved Rottweiler takes his last nap; you may get a reduction in premium. Let your mortgage lender know about the change so they can adjust your escrow payments as soon as possible.

Shopping around for a better premium, or having all your insurance needs carried by the same company for a multi-policy discount can also amount to a lower insurance premium. But the savings may be minimal; I saved $60 a year when I switched to the same insurer for home and auto. And when you divide that $60 by twelve months, it only amounts to five dollars less each month, so it really wasn't anything to get excited over.

Private Mortgage Insurance (PMI)
PMI premiums are also commonly handled through escrow payments. Conventional loans usually require PMI when the borrower has put less than 20% down on the purchase of their home. This insurance protects the lender in case the buyer defaults, since lower down payments are linked to higher rates of mortgage defaults.

You can request for PMI to be cancelled once you reach an 80% loan-to-value ratio, but you may have to pay for an appraisal and do some legwork to get it done. But lenders are required to automatically drop PMI when your loan-to-value ratio is 78%. That's great news if you find your monthly escrow payment has decreased due to dropping PMI; it means you've really begun to build up some equity in your home.
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Friday, 23 August 2019

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