Buyers & Sellers, Contributor Article, Real Estate & Personal Finance

Cancel impound account? There’s a fee

Responsible homeowners call practice 'extortion'

DEAR BENNY: Can you explain how a bank can legally charge a quarter of a point of the loan to opt out of an impound account? We have always paid our property taxes twice a year and always on time and have excellent credit. It feels like extortion to me. –Jerry

DEAR JERRY: It may not be legal extortion, but it’s close. For years, lenders argued that it was necessary to collect escrows for taxes and insurance (also called "impound accounts") in order to make sure that the real estate taxes and insurance policies would be paid and kept current.

This argument persuaded the feds to allow mortgage lenders this right. When Congress enacted the Real Estate Settlement Procedures Act (RESPA) back in the 1970s, it put a limit on the cushion that lenders could take from homeowners. If the lender is covered under RESPA — i.e. is a federally related or insured lender — it can not take more than approximately two months of additional escrows per year.

Some states also limit the amount of escrows that can be taken by mortgage lenders, and indeed it is my understanding that a few states actually require lenders to pay interest on the moneys they are holding in escrow.

But the basic argument that lenders make still remains: We want to make sure that our borrowers keep their real estate taxes and insurance current. So if that’s their position, then why will they allow borrowers to pay their own taxes if they pay a little extra interest on their loan?

There is only one answer: Lenders use these escrowed accounts to their advantage. They get interest on these funds — which for many lenders can be a lot of money — or they use the funds as compensating balances to satisfy regulators’ requirements.

Many lenders will let you pay your own taxes and insurance and will not demand the escrow or a higher interest rate. My suggestion to my readers: Negotiate hard with your prospective lender and see if they will allow you the right to pay these expenses on your own. After all, no one wants to lose their house at a tax sale.

DEAR BENNY: We purchased a home about four years ago. We have an adjustable-rate mortgage called "NCARM MTA 30 yrs adj w/ pay option." The margin is 1.4 and the maximum interest rate is 9.95 percent. At the time, this sounded affordable to us.

We are thinking of refinancing now because the fixed-rate is so low now, but not sure if it’s the right time for us to do it. We understood that we have the jumbo loan, which will have a higher fixed rate compare to the 30-year conforming loan. For the last few months the rate has been dropping each month — last month interest was at 3.65 percent. We’ve been making the full amortized payment each month and sometimes adding extra toward the principal.

Are we taking a big risk by not refinancing to a fixed-rate? I guess we are just confused with the type of loan we have. –Lily

DEAR LILY: You have an option adjustable-rate mortgage (ARM) for which you have the option of how large a payment you will make each month — ranging from a "minimum" that does not even cover the mortgage interest; an interest-only; or a fully amortizing payment based on a 15- or 30-year term. …CONTINUED