| When I explain escrow or prepaid items to my | | | | October, where do you get the money for |
| customers, I always liken it as to setting up a | | | | November and December if you don’t collect |
| kitty. You know, like in poker. A place where | | | | it at closing? Further, if you had closed your loan |
| your money sits until it’s decided where it | | | | in August, and the first payment isn’t due |
| should be paid. And if you’ve ever played | | | | until October, you already had missed out on |
| poker, you keep adding to the kitty, till it gets | | | | collecting escrow for 2 months if the borrower |
| passed out; then another kitty is created, and so | | | | doesn’t make his payment until the last |
| on and so forth, until someone is broke or mad. | | | | minute. You need that kitty to pay everyone |
| Escrow for a mortgage is a very similar situation | | | | when the time is due. |
| except hopefully we avoid the mad or broke part | | | | |
| (particularly the broke part – that kind of talk | | | | The other portion of escrow that is collected is |
| makes a lender nervous). | | | | per diem interest. This escrow portion collected |
| | | | | is why most folks try to close on or about the |
| What exactly is escrow? It’s part of your | | | | last day of the month. The lender usually |
| monthly payment that’s held by your | | | | requires the borrower to pay the interest that |
| mortgage servicer in an account (also known as | | | | accrues from the date of settlement to the first |
| “impounds” or “reserves”) so that | | | | monthly payment. So, if you close July 28th, |
| your mortgage servicer can pay your | | | | your lender will collect three days of “per |
| homeowner’s insurance, taxes and, if | | | | diem” interest from July 29th to July 31st. |
| applicable, mortgage insurance and flood insurance | | | | Interest is collected in arrears, so your payment |
| when the time is due. Some mortgage products | | | | that is due September 1st will include the interest |
| or lenders require escrow. Sometimes, it’s | | | | for the month of August. |
| not required or even allowed. It just depends on | | | | |
| what type of loan you are getting. | | | | The big thing to know about the prepaid section |
| | | | | of a Good Faith Estimate is that you shouldn’t |
| Typically on a purchase, a lender will collect a 1-2 | | | | focus too much on this section when comparing |
| months portion of whatever your annual premium | | | | lender’s costs. Whatever the lender reflects |
| is for your homeowner’s insurance and put it | | | | needs to be collected for escrow may vary a bit |
| into escrow. For instance, if your | | | | from lender to lender, but when you show up at |
| homeowner’s premium is $1000, the lender | | | | the closing table, it just is what it is. The lender |
| will ask for $200 in reserves. In addition, the | | | | can’t control what the taxes are on the |
| lender will also collect the full $1000 premium to | | | | property, when the closing will be or how much |
| pay for your homeowner’s insurance until the | | | | you negotiate for homeowner’s insurance. |
| next payment is due, a year from now. For | | | | Also, many times you can waive escrow, paying |
| taxes, lenders typically collect 4-5 months of | | | | taxes and insurance out of your own pocket |
| reserves. One reason you always have more | | | | when the time is due. This luxury usually costs |
| taxes collected then homeowner’s insurance | | | | you a bit more out of your wallet. Think about |
| is because all city and county entities usually want | | | | where a lender would stand if you didn’t pay |
| the tax bill paid in advance from when it is due. | | | | your tax bill or your mortgage. The tax man |
| For instance, if taxes for 2008 are due in | | | | gets his money first. No big surprise, there, huh? |
