Recurring Costs
Not all loans have the same recurring costs. Therefore, they are listed in order of likelihood that a purchase or refinance escrow will have them.
Prorated
Interest
Prorated
interest, on a purchase transaction, is the interest owed
to the borrower's new lender from the date that the loan funds
till the end of the month. Since loan payments are due on
the 1st of the month, it would be unfair to charge a full
month's payment the very first month. The borrower pays, in
advance, the interest on these remaining days of the month.
On a refinance transaction, the prorated interest would cover one month. It is split between the lenders that have a secured interest in the property that month. The previous lender is entitled to interest from the date of the last payment till the close of escrow. The new lender will charge interest from the date the loan funds till the end of the month. The 1st mortgage payment on the new loan would not be until 30 or more days from the closing of the refinance. There is usually an overlapping day's interest. If the borrower doesn't refinance, the full mortgage payment would have to be paid. The prorated interest is the equivalent of one month's payment less the normal principal reduction.
Property
Taxes and Prorations
Property
taxes are owed on any real property in the State of California
and are assessed by the County Tax Assessor. The property
tax bill covers the county fiscal year, which runs from July
1st to June 30th. The lst installment is due November 1st
and delinquent if not postmarked by December 10th. The 2nd
installment is due February 1st and delinquent if not postmarked
by April 10th.
When the escrow closes, the property taxes will have to be current. The escrow officer will see that the seller pays the taxes, if need be. However, depending upon the time of year, the buyer may owe the seller the prorated property taxes from the date of closing till the date the seller has prepaid property taxes to. The buyer will reimburse the seller for the time period that the buyer will have owned the property. It is possible, early in the fiscal year, that escrow closes and the County has not issued a property tax bill. The escrow officer will then prorate the property taxes based on the seller's prior year taxes. The escrow officer will credit the buyer, from the seller, for property taxes that are yet unbilled.
The buyer or buyer's lender is responsible for obtaining the property tax bill. Due to time delays in county reassessments, 1 or 2 supplemental tax bills will be issued. This is because there is a good likelihood that the county assessor will raise the taxes. If a buyer has an impound account, the bill or bills could be forwarded to the lender. If the lender sends a refund from an impound account, it may be because they have not received or paid the supplemental taxes. This money should be set aside to pay them.
Hazard
Insurance
Hazard
insurance is required any time a buyer has a home loan. It
protects the homeowner and the lender from unforeseen disasters
like fires, windstorms, freezing and other common disasters.
Additional insurance premiums are required if a buyer wants
earthquake or flood insurance. Lenders will require only a
standard policy of fire insurance but could require flood
insurance, if the property is in a flood zone. Premiums vary
from company to company. The buyer should shop different companies
for coverage and cost. For a refinance, the lender will want
at least 4 months remaining on the policy or they will want
the policy to be renewed. Condominiums and townhouses do not
require a policy. This is because they have a policy for the
whole project, which is paid through the homeowners association
dues.
Impound
or Escrow Accounts
Impound
or Escrow accounts are established when the lender collects
funds to pay for items that will recur. Some homeowners prefer
this so they don't have to come up with large sums of money
at a particular time of year. One twelfth of the annual cost
of these items are collected with your monthly mortgage payment.
They are set aside by the lender to pay these items, when
they are due.
The 3 most common items that are impounded or escrowed are property taxes, hazard insurance, and mortgage insurance (PMI for conventional loans and MMI for FHA loans). The upfront costs can vary depending upon what month escrow closes. Property taxes are due November 1st and February 1st (delinquent after December 10th and after April 10th). The further away from these dates at closing, the less the upfront costs. This is because the lender will receive more payments before the taxes are due. This allows the escrow account to accumulate funds as payments are made.
Calculations
Property
tax impounds are calculated by multiplying the purchase price
by 1¼ per cent and dividing by 12 months. Then it is
determined how many payments a borrower will make until the
property taxes are due. Six months taxes are needed to be
in the escrow account by November 1st and then another six
months on February 1st (3 months later). With property tax
impounds, it is wise to figure about 3 to 6 months will be
needed.
Hazard Insurance impounds are calculated by taking the borrower's premium and dividing by 12 months. The lender will want enough funds in the escrow account to pay the full year's premium on the date the policy premium is due. In a purchase transaction, they will want a 2 month positive balance. This way they can pay the premium when billed next year. For refinances, they simply count the months till expiration and collect the rest.
Mortgage insurance is default insurance that is required on a Loan to Value that exceeds 80%. Two loan combinations (piggyback loans) do not require PMI but FHA loans always require MMI. The premium could be as little as .32% to as much as 1.04% of the Loan. FHA renewal premiums are always ½ percent on a 30 year loan. They premiums are paid monthly through the escrow account.
Homeowners
Association Dues
Homeowners
association dues are common area expenses that are associated
with condominiums and planned unit developments. Homeowners
dues for condominiums are more expensive as they cover the
hazard insurance and general long term maintenance items (roofs,
painting, plumbing, and parking areas). For Planned Unit Developments
they might only cover the maintenance of the greenbelts, the
guard gate or a community swimming pool. Most detached single
family residences do not have homeowners association dues.
The management
company may want to receive the first month's homeowners dues
at the time of closing. In addition, the seller should receive
a daily prorated credit for the month escrow closes.
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