Homeowners must pay property taxes and they must have some type of
homeowners insurance. Depending on state laws and other
variables, most
lenders require homeowners to pay into what is called an "escrow account."
In this account, the lender or mortgage
servicer
keeps enough money to cover
your property taxes and homeowners insurance. You pay into this account each
month as part
of your
mortgage payment. When your taxes are due, the
lender/servicer pays them for you. The same is true for your insurance.
The lender/servicer sends you a periodic statement showing how much is in
this account. You can compare the statement with
your property tax bill and your homeowners policy to ensure that the right amount is being
held to cover the payments.
The Real Estate Settlement Procedures Act (RESPA), which
is enforced by the U.S. Department of Housing and Urban Development,
(HUD),
is the major law covering escrow accounts.
It is important to maintain the required property insurance on your home. If
you don't, your lender/servicer can buy insurance on your
behalf. This type
of policy is known as "force placed insurance"; it usually is more expensive
than typical insurance, and it provides less coverage.
If you're buying a house, most sellers disclose the amount of the annual
property taxes on the house when it is listed for sale. If they
don't,
you can easily get this information from your local property tax assessor. A
local insurance agent can give you an idea of the annual
insurance cost. Divide each of these numbers by 12 and add them to the principal and
interest to get the estimated total monthly payment.
If a buyer puts down less than 20 percent of the selling price on
the mortgage, lenders may require the buyer to buy another type of
insurance called private mortgage insurance (PMI). This provides insurance to the
lender in case the buyer is not able to repay the loan
and
the lender is not able to recover costs after foreclosing the loan and selling the property.
The annual cost of PMI can vary but usually is between .19
percent and 1 percent of the total loan value, depending on the
loan terms
and loan type. PMI can be paid up front but most
buyers prefer that it be included in their mortgage payment. The
cost can vary based on
several factors that include: loan
amount, loan-to-value ratio, occupancy (primary home, second
home, investment property),
documentation provided at loan
origination, and probably most of all credit score.
Once the principal of the loan reaches 80 percent (the owner has
20 percent equity in the home), the PMI is usually no longer
required and can be canceled, although you may have to prove
your equity by having a new appraisal done to show that the
house
is worth at least
20 percent more than you owe on it.
(Note: Some lenders may require that PMI be paid for a fixed
period even if
the principal reaches
80 percent.) The
cancellation request must come from the servicer (the company
you send your mortgage
payment to) of the mortgage to
the PMI
company that issued the insurance.
Note: PMI may be waived or avoided through some types of
government or other loans. Check with your lender to determine
your situation.
Maria and George have found a home that costs $150,000.
They are able to make a down payment of 5 percent, or $7,500. The
annual
property taxes are $1,650 and the annual homeowners
insurance is $780. These payments are made in monthly
installments in their
mortgage and are held in an escrow
account. When their taxes and insurance are due, the lender (or
mortgage servicer) makes the
payments
for them.
Because their down payment is less than 20 percent, Maria and
George will pay PMI as part of the mortgage
payment. With a
30-year fixed mortgage and an interest rate of 6 percent,
the PITI with PMI is as follows:
-
Principal and Interest (P and I): $854.36
-
Monthly Property Taxes (T): $137.50
-
Monthly Property Insurance (I): $65.00
-
Private Mortgage Insurance (PMI): $85.50
-
Total payment: $1,142.36
