Weekly Mortgage Update

Today’s Topic: Escrow Account

  As we move into the middle of the year escrow account set up amounts are starting to rise. This is because taxes are due in December.  The account has to have the funds to make that payment.  A July closing with a September 1st payment escrow account on a typical $200,000 purchase will require a $1,700 opening balance.  With an existing home the buyer will receive a tax credit of around $1,300 for the seller’s portion of this year’s taxes leaving the buyer responsible for the difference.

  The challenge comes with new construction.  The lot value only tax credit from the builder will be very low making the buyer responsible for almost all of the $1,700.  An August closing moves that number to $2,050 and a September closing moves it to $2,400.  Add another full year of insurance and daily interest and you have over $5,000 in escrow costs.

  Sometimes the buyer needs that money for down payment or other closing costs or a down payment threshold (10% vs 5%) or one time PMI.  My general rule on new construction is to escrow for the full value unless that money is critical for some other purpose.  I then spend a lot of time explaining and documenting how starting the escrow account based on lot value taxes works.  I even tell them to set a calendar reminder for January to adjust their mortgage payment. We also include documents in their closing packet. 

In other news – rates are creeping up.