Dennis' Mortgage Blog

Question of the week:  What is an “impound” account and what are the positives and negatives of having one?

Answer:  Good timing with this question because in California property tax bills are going in the mail this month with the first half tax payment due by December 10, 2009 and the second half tax payment due by April 10, 2010.  Note to those refinancing between now and December, you will have to pay your first half taxes through your escrow, do not just mail in your check to the county as title companies will have to see proof they are paid.  Best way to show proof is have the payment sent be escrow as part of closing.  For those of you with an impound account, chances are you will have to come up with the funds to establish the new account and pay the payment for December and then get a refund from your current lender.

An impound account, also known as an escrow account, is set up with a lender by a borrower as part of their mortgage.  The account is used to collect on a monthly basis funds for homeowners insurance, mortgage insurance (if applicable) and property taxes.  For some borrowers having such an account is not an option, if you are applying for an FHA mortgage or a mortgage where the loan amount is greater than 90% of the value of the property an impound account is required.  For everyone else, they have the option of establishing an impound account or not.

What are the benefits of an impound account?  Primarily is the breaking down of large payments for taxes and insurance to a smaller amount.  If you annual tax bill is $5000 per year, rather than paying $2500 in December and $2500 again in April—when by the way many of us also pay Santa Claus and Uncle Sam—with an impound account you would pay in addition to your payment for your loan $417 per month for the taxes to the lender.  As well you would include payment for your property insurance, again taking the annual premium and breaking it down to monthly payments.  When the property taxes are due the lender will send the funds to the county.  When the property insurance is due the lender will send the funds to the insurance company. 

Way back when there was little to no control over the impound accounts and lenders would sit on huge reserves for borrowers.  In the late 1980s and early 1990s regulations began to be implemented that limited the number of months reserve a lender could have on hand and also mandated that lenders pay interest for the funds to borrower—in California anyway, different states have different laws.  No one will get rich off the interest as it is usually less than what banks pay for passbook savings.  The point being that impound accounts are much better managed and in the borrower’s favor today than they were in the past.

So the basic benefit of having an impound account is the ability to pay your taxes and insurance in small increments throughout the year, that way assuring your obligations for taxes and insurance are funded and paid when due.

What are the drawbacks for having an impound account?  First, it increases the funds needed for closing since there needs to be enough money with the lender when the first tax payment is due.  Depending on when the first payment on a new mortgage is due, the amount collected at closing can range from 2 months to 8 months of taxes pre-collected at closing. 

The second drawback is the lack of control of your payments for taxes and insurance.  While the overwhelming majority of impound accounts are managed properly, there are humans behind the wheel and sometimes mistakes are made.  When a mistake is made it is not a pleasant endeavor to unravel paid impounds and missed payments.

My advice to borrowers regarding impound accounts is based upon their ability to manage finances.  Do you have the ability and discipline to set aside funds every month for your taxes and insurance, essentially establishing your own impound account?  Is your income steady on salary or up and down on commission or through self-employment?  If you do not have an impound account through the lender is your financial situation such that you will be able to make large payments in December, April and when your insurance is due?

The most important question is:  what makes you more comfortable and is your preference, to make monthly payments or make large payments monthly?

If you do not have an impound account and are a homeowner, note that as of today you have sixty-nine days until your first half taxes have to be in the mail!

Have a question for me?  Ask me!   

Time is running out on the IRS tax credit!  If you are considering purchasing a home this year, are qualified and wish to take advantage of the IRS credit hurry and get into escrow.  All escrows must be closed by the end of business on November 30, 2009.  Are you qualified?  Click this link IRS Form 5405 for Frequently Asked Questions click here IRS FAQ

After eight trading days in a row of mortgage backed securities (MBS) closing higher at closing (reminder: MBS price higher = rates lower = good thing!) today we may see our first negative closing, or not…

Mortgage Backs soared first thing this morning when the Labor Department reported unemployment numbers for September (263,000 jobs lost) as the number was higher than expectations and higher than the number for August.  Instantly the pundits started speaking about the recovery not really happening, sky is falling, doom, doom.  Bond investors reacted and sold off on stocks and bought mortgage backs.

Then the deep breath was taken and in looking at the trend of jobs lost per month it is the second lowest, to August 2009, number of jobs lost in a month in the last year.  While not good to have job lost, and to see an increase from the prior month, the question becomes trend or one time reversal? 

One really good part of the conversation that the job loss increase creates is: What is happening with all the money?  Banks are flush with cash right now and they are not making loans.  Particularly they are not assisting small businesses who are the number one employer in America.  Until small businesses can secure lines of credit against their accounts receivables, obtain equipment loans for updating their shops and otherwise be able to borrow some funds when needed to support the growth of their businesses they will not be able to hire more workers.

Of interest in the numbers this week is that personal spending has increased.  The American consumer is the primary fuel for our economy.  Until Joe starts buying new wrenches and Mary replaces her old hair dryer and Alberto puts new tires on his truck our economic growth is stalled or very sluggish.  While this current recession has put some very good financial habits in many American households, habits like saving more and spending frivolously less, we will not find stability until the American consumer begins consuming again.  Because of the lessons learned on the wild consumption of the early part of this decade we can expect a more restrained consumer which should lead to a more restrained growth in the economy when it begins.

Of great interest in the numbers was the number for Gross Domestic Product for the  Quarter, it shrank only 0.70% well below estimates and 30% less than the previous quarter.  Slowing shrinkage is a good thing because until the shrinks stops we can’t grow.

Quickly running through a week of numbers, as mentioned personal spending increased, but consumer confidence dropped and was much lower than estimates—we want to spend today but are not that confident about spending tomorrow.  Personal income saw another slight increase, two months in a row, which is positive as employers pay overtime to current workers before higher new ones.  Finally home prices across the country climbed about 1% nationwide in July per a report in the Wall Street Journal, that combined with pending sales of existing homes increasing are positive signs for the housing markets and industries.

All this data has led us to a record.  This morning the conforming 30 year fixed rate loan priced on the criteria I have used for several years (purchase, 20% down, FICO of 740, single family residence, owner occupied) is at its lowest level in my career.  The previous low I have seen was 4.625% in March, May and September of this year—each time lasting a day or so. 

Rates for Friday October 2, 2009:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.5%                                Down 0.25%

30 year conforming-jumbo 4.875%                   Down 0.125%

30 year FHA    4.5%                            Down 0.25%

30 year FHA jumbo 5.00%                              Down 0.125%

Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount. 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

The weather forecast in the paper says our local temperatures will dip below 70 degrees this weekend—I hope so! Of course last week they said we would be in the high 70s and we topped 100 so who knows.  I will be spending a good part of the weekend in the home office working on files and numbers for clients, so if you need numbers give me a call!

Have a great weekend, it looks like it will be a great one to buy a home and if you are intending on using the first time home buyer credit you better get into escrow quick!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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