What is an escrow account and how does it work?

Monthly mortgage payments often include not only principal & interest, but also payments to an escrow account for property taxes, and for homeowners insurance (HOI). The amount collected for escrow per month is 1/12 of the annual premium for these two items. For example, if your property taxes are $2400/year, you would pay $2400/12 = $200/month into the escrow account. Likewise, if your HOI is $1200/year, your mortgage company would collect $1200/12 = $100/month for HOI escrow.

By collecting these payments monthly and depositing them into an escrow account, your mortgage company can then pay your annual HOI bill and your semi-annual property taxes on your behalf. This can be helpful so that you don’t have to budget for these large and infrequent bills. It also ensures that these items are paid in full, and on time. When you pay off your loan (often by refinancing or selling your home), you will receive any escrow balance back from your mortgage company within a few weeks.

Each year, your mortgage company will evaluate your escrow account to be sure you have sufficient funds, as the tax rates and HOI rates can change. If too much escrow money has been collected, expect a check from your mortgage company. More likely (unfortunately), your monthly escrow will need to be increased as tax and insurance rates go up, and your monthly payment may increase slightly to cover the additional costs.

An escrow account is typically required on loans where the loan-to-value (LTV) is greater than 80%. At 80% LTV or less, escrows can be waived if you choose, allowing you to pay these bills on your own if you prefer. Not all mortgage products and mortgage companies will allow you to waive an escrow account, so be sure to ask us at LendSolid about this option if it interests you, and we can review the pros and cons with you, so you can decide what works best for your unique situation!

To learn more about how we can help you with your particular situation, please email or call us today at (301) 325 2542.

Why is my APR different than my interest rate?

Your interest rate is simply the cost of borrowing the principal amount of your loan. Your APR (annual percentage rate) attempts to combine all the costs of your mortgage (interest rate, lender fees, discount points, closing costs, etc.) and represent this total cost as a percentage.

The APR was developed to compare multiple loan options – specifically to weigh the advantages or disadvantages of paying points or fees to a mortgage company to buy down a rate. Let’s look at the chart below to see three examples of a $500,000, 30 Year Fixed Rate loan, with 0, 2, and 4 points to buy down the interest rate.

Example #1 #2 #3
Loan Amount $500,000 $500,000 $500,000
Interest Rate 5.000% 4.750% 4.500%
APR Closing Costs  $ 5,000  $ 5,000  $ 5,000
Points 0 2 4
Total Costs  $ 5,000  $15,000  $25,000
P&I  $ 2,684  $ 2,608  $ 2,533
APR 5.089% 5.016% 4.943%

Example #1 has an interest rate of 5%, with 0 points (no cost to buy down the rate). Example #3 has an interest rate of 4.5%, which costs 4 points (or $20,000 – 4% of $500,000). Example #3 has the lowest APR, but is this best?

If you made payments for 30 years, you would save money by spending an additional $20,000 to get a lower rate. However, there are two other considerations. Firstly, will you make payments for 30 years? The average 30 Year Fixed mortgage lasts for well under ten years, at which point the home gets sold, refinanced, or the loan otherwise paid off. Secondly, that extra $20,000 you spend today is worth a lot more than the dollars you save many years down the road given inflation, and other considerations.

This may seem confusing, but the bottom line is that a decision on a mortgage shouldn’t be driven by something that can be boiled down generically to a single number, like APR.

At LendSolid, we believe the standard should be to not pay lender fees, discount points, or origination charges when getting a mortgage. Therefore, our loans generally have $0 in lender costs. You have enough other costs outside of the loan, and the costs of paying for a lower rate generally outweighs the possible benefit. Of course, every scenario is different, and we would be happy to review yours!

To learn more about how we can help you with your particular situation, please email or call us today at (301) 325 2542.

Do I really need a Pre-Approval or Pre-Qualification to buy a house?

A Pre-Approval is a great tool for you and your Realtor when making an offer on a home. The Pre-Approval serves a few purposes:

  • Demonstrates to your Realtor that you are a serious buyer
  • Strengthens your offer — the seller knows you can qualify for a mortgage
  • Enables your lender or broker to troubleshoot your loan before you are under contract
  • Empowers your loan officer to convince a seller’s Realtor that you are a strong buyer
  • Allows for time to fix any potential credit issues should any appear on your credit report
  • Simplifies the mortgage process once you have a ratified purchase contract

Additionally, during the Pre-Approval process, your Loan Officer can also assist in evaluating your options and answering any home buying questions, before you make an offer. Estimating monthly payments, evaluating down payment options, explaining closing costs, and many other variables can be reviewed.

If you are serious about purchasing a home, you absolutely should get a Pre-Approval. We think you should get one from LendSolid, and would be happy to help. There is of course no cost for a Pre-Approval, and we would be happy to answer any other questions you or your Realtor may have about the loan process, or mortgages in general. We look forward to hearing from you!

To learn more about how we can help you with your particular situation, please email or call us today at (301) 325 2542.