When you get a mortgage for your home purchase, if it’s a fixed-rate mortgage, the only amount that is likely to change over the life of your loan is your escrow payment – the amount set aside for taxes and insurance.
Industry experts warn that homeowners should look carefully at their own escrow statements, as mistakes do sometimes occur, especially if the property is in an area with several taxing authorities and one of them is overlooked.
Other mistakes may be made later on: the lender or mortgage servicer may have missed a tax payment or allowed the balance to grow beyond limits allowed under the Real Estate Settlement Procedures Act. The federal law allows lenders to keep a cushion of up to two months’ total escrow payments.
One way to avoid any problems is to request to pay your homeowners’ insurance and property taxes yourself. Borrowers can request to do so before the mortgage closing or by contacting the customer service department of the lender or servicer of the loan.
Some lenders charge a one-time fee to forgo an escrow, typically around a quarter of a percentage point of the loan balance, or $500 on a $200,000 mortgage.
Many homeowners are filing property-tax grievances to reduce their assessed valuation and tax payments, since many towns and municipalities only reassess properties every five to seven years, and property values have dropped so dramatically in recent years, some homeowners may be paying tax on an old valuation of their property.
One thing to keep in mind however, even if your home’s value has decreased, your taxes may not fall, because some cities and towns are raising millage rates, or the rate at which property taxes are calculated, to preserve local services.
If your lender is handling your escrow and you successfully appeal your tax assessment, your lender may continue with the same escrow payment, at least until the next tax bill arrives, and possible even longer. You could be paying more into the escrow than you need to be paying, so it’s always wise to monitor your escrow statement carefully.
Owning your own home is part of the American dream. But according to a recent Wall Street Journal article, owning a home is not always the best idea.
Some Americans who cashed in on the $8,000 first-time home buyers credit before it expired in April 2010 got a bad deal. The credit pushed up sales prices, which then dropped dramatically when the buying frenzy ended.
So is it better to rent a home than buy? That’s not always the case, either. Let’s look at the tax benefits for a residential homeowner.
Consider a Midwestern family of four who bought a three-bedroom house they could afford. Suppose they got a thirty-year, $200,000 loan with 4.5 percent interest, for a monthly payment of $1,015. Add in an estimated average property tax of $1,625 and insurance of $1,200 per year, and the total annual lodging expense would be around $15,000—or $1,250 per month.
In this scenario, $13,500 worth of mortgage interest and property taxes would be deductible. Folks in a combined federal and state tax bracket of 30 percent would save $337.50 per month. After taxes, that home would cost them $912.50 per month.
How much would a similar home cost to rent? Looking at the area around Chicago, Ill., we can find two- to three-bedroom homes available for around $1,500 per month. Taking into consideration the tax benefits for homeowners, renting a home would have cost the family $7,000 more per year than owning one.
Even after a drop in value within the first year, the family came out just about even between renting and buying. Families who buy homes they can afford tend to stay in those homes for a decade or more. In the long run, the prices rise, and the loan balance declines. When they get ready to sell in ten to thirty years, they walk away with a profit.
People who select homes where the monthly mortgage, property tax, and insurance payments are no more than 15–30 percent more than their rent will always fare well in the long run.
So—Rent or Buy?
The answer is different for every family, in every market. With interest rates the lowest they’ve been in generations, it’s certainly worth looking for a home to buy. The time may never be better than it is right now.