How to Reserve on My Escrow Account

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An escrow account is, simply put, a financial repository. Reserve on an escrow account with help from a real estate and mortgage professional in this free video clip.

Part of the Video Series: Finance Tips
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Video Transcript

Hello, this is Sidney Potter with Potter Equities in Pasadena, California. Thank you for your time. I run a small operation out here that's real estate related and I think I've got some good advice for you on how to reserve on your escrow account. Now let me define what an escrow account is very quickly. An escrow account is a repository. It's a repository for the pro rata share of typically taxes and insurance. The purpose of having taxes and insurance put into a repository account is to make certain that those items are paid on time and it's per the mortgage note to make certain that there's not a foreclosure on the property and/or that there's a lien placed on the future of the property. Now if you're a homeowner out there you're going to be concerned about reserve accounts. It should be noted first and foremost some banks actually require that there be a reserve on the account and that is typically required when there's less than 20% equity in the property. Many loans out there are what they call an 80% LTV which is loan to value, where they put 80% of the money up and the borrower, that being yourself is required to put up 20%. Well, if it's less than 20% equity in, which the borrower is putting up, typically these are FHA loans where you're putting 3.5% down you're going to have a mandatory reserve account. It's what they call PMI, private mortgage insurance. Now, banks can sometimes violate by taking money out of your escrow account or of your mortgage payment when they're not required to and if that happens to be the case, you'll want to look at the language in your mortgage agreement and make certain that's not taken out. Sometimes it happens by accident, sometimes banks do this to be very prudent especially with the devaluation of real estate that we find in 2011/2012 but if you find that that should happen to happen to you where you find that money is being sheeted out of your account for PMI for insurance and taxes you'll want to get that corrected. Now, something to keep in mind is that some banks have what they call a built in reserve account where they automatically take that money out. You as a consumer, as a mortgagee and they're the mortgager can have a stop to that payment once the equity exceeds 20%. It's what you call having a little bit more skin in the game. That way there's a protection against the property possibly having a lien. Now when you exceed the 20% equity banks now, it connects with the Frank Dodd Act that was passed in 2010 where a bank will be required to do another evaluation on the property to determine the exact equity amount and in that case they unilaterally they will be required by law to stop the reserve account. Reserve account could be an additional $100, $150, $50 a month and some consumers choose not to have that. Now here comes a question, when can you cancel the PMI. Well, it may be never actually depending on the value of the property and just as I mentioned a moment ago you can unilaterally have that PMI, private mortgage insurance stopped depending upon the equity. Now, something that you should keep in mind is that homeowners will sometimes voluntarily and this is a very prudent thing to do, something I would recommend if you have the money would voluntarily want to have escrow accounts. Why, because it's very simple. When you're closing on a piece of property you can either pay the property tax upfront which may be several thousand dollars or you could pay the insurance on the property which may be a $500 to $1,200, $1,500 amount upfront when you close the property or you can roll that amount into the loan. Most homeowners will prefer to have that amount amortized over a 12 months period. So instead of paying an extra three to four thousand dollars for example at the close of escrow on a piece of property you have really what you would call a defacto payment plan broken up in 12 months. That's much more affordable and preferable by some consumers. It really is at your choosing. So with that this is a very quick summatic of what I call a $30,000 foot view of a reserve account and I'm very hopeful that it's going to assist you. Once again, my name is Sidney Potter with Potter Equities, Pasadena, California. I appreciate your time and as I always say I'll see you at the finish line. Good day.


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