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
I asked my colleague Jack Guttentag, the "Mortgage Professor," about your situation, and he advised me that he has never seen an option ARM with a 1.4 percent margin. Jack advises (and I concur) that you should first find out exactly what kind of mortgage you have, and then you can decide whether it makes sense to refinance. He also suggests that you look at his Web site where you will learn a lot more about mortgages and especially ARMs.
DEAR BENNY: We have a home in a subdivision with an HOA responsible for garden services and a pool. The HOA is managed by a professional real estate broker. The agent has total control over the budget and the restricted reserves. Is it acceptable for the agent to have complete control over this account without reporting any details? We do receive a copy of the annual budget without any reference to our restricted reserves. –Roy
DEAR ROY: In a homeowner’s association (HOA), as with condominiums, there are legal documents. There should also be a board of directors — and the board has the legal authority to control the budget and the reserves.
Clearly, over the years, that real estate agent took it upon himself to deal with your finances. I suspect that no one else wanted to step up to the plate and serve on the board.
The agent may be honest and careful with your money, but it is your money and you (and all other homeowners) have the right to know what is coming in, what is going out and — perhaps more importantly — the level of your reserves.
My suggestion: Contact many of your neighbors and call a meeting. See if they have the same concerns, and if so, retain an attorney to assist you in getting a handle on the situation.
DEAR BENNY: What is your opinion of reverse mortgages? We have a home assessed at $157,000. Our nest egg is being eaten away and I was wondering about the benefits and pitfalls of a reverse mortgage. –Richard
DEAR RICHARD: Recently Congress put some restrictions on the costs that lenders can charge for reverse mortgages, so it is too soon to learn the results of that legislation.
A reverse mortgage is an interesting concept. You can tap the equity in your home and take out your money in three different ways. You can get a lump sum; you can get monthly or quarterly annuities; or you can use the mortgage as a line of credit, writing checks when you need the money.
But there are a number of negatives. While you do not have to pay any money to the lender, the interest will accrue on a monthly basis. That means that over the years, the equity in your home will disappear. When you die or decide to sell, the lender will be paid off in full. Because the lender runs the risk that at that later date, there may not be enough equity to be paid off in full, the charges are higher than if you obtained a conventional mortgage.
I suggest you do your homework first. There is a lot of good material on the Internet (just type in "reverse mortgage" at your favorite search engine). I recommend going to the AARP Web site because they are continuously examining these types of loans, and they are not lenders and thus try to be completely objective. …CONTINUED
DEAR BENNY: Our neighbor has planted some fast-growing bushes on her land, close to the boundary between our lots in order to provide some privacy between our swimming pools. These bushes grow upwards and outwards, overhanging our land, which we do not like. She sometimes has them trimmed back, but they very quickly grow again and, as we do not like to keep asking her to have them trimmed again, we do the work ourselves. She objects to that and suggests that we are not allowed to trim her overhanging bushes. What’s the legal position? –Richard
DEAR RICHARD: It is my understanding that in all 50 states, homeowners have the absolute right to trim overhanging branches and bushes, and to cut off roots that trespass on your property. Whether you can force your neighbor to trim her own shrubbery depends on your specific state law.
You may also have the right to file a lawsuit against your "neighbor" based on a private nuisance theory. You would have to explore this concept with your own attorney.
DEAR BENNY: Several years ago we purchased a house, and the seller provided financing. We now plan to refinance the loan with a third party. The seller/lender is named on all of the legal documents (i.e. deed of trust, insurance, etc.). What documents do we need to use to remove the lender’s lien position? Do we bring the documents to the county recorder’s office? Basically we want to get the official records to indicate there is no longer a lien holder. –Kim
DEAR KIM: You have to get a payoff statement from your current lender, and make arrangements with him that you will exchange your check in the amount of the full payoff with a release of your present deed of trust (in some states it is called a mortgage). You should also contact your insurance company and change the name of the "beneficiary" from the current lender to your new one.
But let me make a suggestion. Your new lender — whether it is a private person or a commercial company — will want its loan to be documented properly. The lender will also require a title search, to assure it that it will be in first place position, with no earlier liens ahead of it.
So your best approach is to retain a local real estate attorney who should be able to assist you throughout the entire process.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
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