Granny's escrow account shocker

DEAR BENNY: My grandmother is in her home, already at the breaking point: It's a question of food or medicine. Her house payment is $400. She's usually a bit late paying the property tax. This month she signed papers to let the mortgage company set up an escrow account. The lender paid taxes and insurance to the tune of $1,800, and now they've jacked the payment up by $270 each month, which is more than $3,200 extra a year!

Can the lender really do that? They've loaned her too much against the house, and they do not want the note to go bad. How could they be so stupid as to price someone out of a home that's not worth anything near the note? What are these dead-brained morons trying to do here?

How can we get the lender to understand that she simply does not have the extra $270 to pay each month? If she pays it, her utilities go off. --Fred

DEAR FRED: I understand your frustration. Lenders have the right to escrow for taxes and insurance, unless your state law either prohibits it or puts limitations on this right. But federal law (the Real Estate Settlement Procedures Act -- commonly known as RESPA) does put a limit on the amount of money a lender can hold above and beyond the actual payment obligation. A lender cannot hold a yearly cushion of more than two months' escrow.

But I have a real problem: While I certainly do not want any homeowner to be kicked out of his/her house, from what you have written your grandmother is financially on the edge; right or wrong, she has to pay insurance and taxes, and usually it is easier to escrow on a monthly basis rather than coming up with the entire amount when the payments are due. For most people, I don't like the concept of escrow -- but in your grandmother's case, I believe it is necessary.

I recommend the following: (1) ask the lender why it appears it is violating RESPA; (2) ask whether there are senior citizen real estate tax breaks in the state (or county) where your grandmother lives; and (3) have your grandmother look into a reverse mortgage.

DEAR BENNY: I plan to take out an equity loan on our house in order for our daughter and her husband to buy a house that is in foreclosure. Her husband is asking his parents to supply the same amount of money. Besides the remote possibility that they might not be able to repay the loan, can you tell me of the legal pitfalls that might occur taxwise in a situation like this? --June

DEAR JUNE: Sounds like a good plan to help your daughter and son-in-law. Yes, one pitfall is that they may not be able to repay the loan and you (and your son-in-law's parents) could lose this investment.

One possible pitfall -- which I am sure no one wants to consider but we must be realistic -- is that there could be a divorce in the future. I suggest that you enter into a written agreement with all parties (including the parents of the son-in-law), which will spell out the priorities of payment in the event of a divorce or legal separation. Additionally, if your daughter's lender does not object, both sets of parents should insist on having a second deed of trust placed on the new property. Your attorney can assist you in drafting the appropriate document.

One more pitfall: Does your home equity line of credit have a variable interest rate that can increase over time? If so, can you afford to make the higher payments? ...CONTINUED

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