Upon first glance, one would think that the answer lies in whether you could get a better rate of return on the money that you’d be putting into escrow each month if you kept it and invested it versus the waiver fee.  But there are several factors that come into play when considering which way to go.   For starters, it is convenient for most folks because it is budgeted for and handled by the lender at no extra cost.   This way you’re not hit with a lump sum bill that you hadn’t budgeted for.  If you do have a tight budget or you’re not real disciplined, this is probably the way you should go.

On the flip side, most lenders require three months of reserves to start out an escrow account.  This is a cushion should the taxes or insurance premium go up (as they generally do) the following year.   And if there aren’t enough funds, they hit you up with a shortage which is due either as a lump sum or they will conveniently add it to your monthly payment, which can crimp your budget. 

The biggest problem is that escrow accounts can be difficult for the average person to reconcile, although the lender sends an “Escrow Analysis Statement” at the end of the year.  But too many people rely on the lender to be correct, and millions of dollars go unaccounted for each year by way of escrow accounts.  My advice is to pony up the fee and waive the escrow account.  However, if you’re more comfortable carrying an escrow account, be sure that you can account for every penny flowing in and out of the escrow account.  If you don’t understand the analysis statement, be sure to contact the lender and go over it in detail until you do.

This is where the marketing aspect comes in.  Some lenders will use this compensation to subsidize the fees they normally charge.  That is why you can find lenders with lower rates and higher fees or higher rates and lower fees.  One way or another, you end up paying for it.  Essentially you’re just financing it into the rate, with less due out of pocket at closing.  If you shop long and hard enough, you can find the best of both worlds: a lender with low fees and low rates.

All of this is assuming a loan with no points as points should only be paid to buy the rate down.  However, this is usually not a wise investment.

Believe it or not, 65% of all mortgages in America are originated by mortgage brokers.  Because many of those brokerages are small businesses, they can keep their overhead low and effectively lower their margins.  This means lower rates and closing costs for consumers.  Although lenders quietly solicit mortgage business, it costs them much more to originate a loan as they have to maintain a larger staff to do so.  Therefore, they rely on thousands of mortgage brokers who in turn have “mortgage sales people” to find the business.  The lender pays the broker a commission for finding, processing, and delivering the loan to them. 

But not all mortgage brokers were created equal.  You still want to shop for the best deal as some charge unnecessary origination fees for their services.  But don’t be fooled, the lender is paying them for their services so you shouldn’t have to.

A bi-weekly mortgage is set up so that your mortgage payment is automatically debited out of your checking account every two weeks, thus making 26 payments a year.  This is actually just one additional payment per year (26 payments divided by 2 equals 13 payments a year instead of the normal 12).  Of the bi-weekly mortgages we offer, most come at a higher rate, typically .25% higher.  Some even have set-up fees and ongoing monthly “administrative” fees. 

Using a loan amount of $150,000 at 6% over 30 years set up as a bi-weekly loan, it took off 5.6 years paying the loan off in 24.4 years.  It also saved $32,855 in interest versus a traditional 30 year loan.  This assumes you stay in this mortgage for a long time to reap the benefits as well as recoup any fees associated with the loan.

Now what happens when you just make one extra payment a year on your own?  Using the same numbers as above, $150,000 at 6% over 30 years is $899 P&I per month so that would be an extra $899 a year.  But what if you just don’t have an extra $899 left over at the end of the year, especially around the holidays?  Well, the good news is you don’t have to.  The trick is, divide the monthly P&I payment by 12 and add that to your monthly payment each month (using round numbers, $899 divided by 12 equals $75 so the total monthly payment would be $974)  This scenario takes off 5.4 years and pays the loan off in 24.6 years, slightly longer than the bi-weekly.  But the real benefit is that you save $36,853 which is $3,998 more than the bi-weekly due to the way the loan is compounded.

So don’t be fooled by the touted advantages of the bi-weekly loan.  Use simple elementary level math to do the work for you!

The tightening has been taking place since last year, with the focus being on equity and credit scores, completely ignoring those who may have less than 20% equity or a credit score below 680.  But new guidelines are focusing on who has been responsible enough to keep up with payments, rather than just sticking to a “set” formula.  The focus has been on those who couldn’t keep up, so it’s good to finally see relief for those of us who have making payments on time and doing whatever we have to to keep our heads above water. 

So far, only Fannie Mae has released their new guidelines so your loan must be a Fannie Mae serviced loan (contact your current lender or visit http://www.fanniemae.com/homeaffordable to find out if your loan is a Fannie loan) Some of the most important changes include:

• No PMI required on a refinance if you previously didn’t have PMI.  In other words, if your home’s value has dropped (most likely the case) and you go to refi and you now have less than 20% equity, then you won’t be required to have PMI.
• Ability to refinance a loan with an existing second mortgage where the total LTV (loan to value) is up to 105% of the value.  (Previously this was 95%)
• Relaxed credit score requirements for scores below 680.

As you can see, they are really working hard to help everyone, not just those on the brink of foreclosure.  And I believe many more changes are coming for responsible homeowners, including lower rates.  Stay tuned…

More importantly, rates change daily and they can change quickly. Some mortgage professionals have recently noted that their rate quotes have only had shelf lives of three to four hours before market changes have deemed them inaccurate.

How does a consumer navigate fast changing markets in order to refinance their existing loan or purchase a home with the most favorable terms possible?

1. Plan – Define your needs ahead of time, do not wait until the last minute. This is especially true of home purchases.
2. Consult – Talk to your mortgage professional on a regular basis so they can interpret recent market events to you and communicate how those events can affect you.
3. Execute – When you have defined your needs and have determined that now is the best time to move forward, don’t shop yourself out of a good loan! What does this mean? It is easy to get caught up in shopping for the best rate, but it is not uncommon for home owners to miss locking their loan at a great rate because they are in search of better rates that do not exist or that they do not qualify for. It is important to shop to insure you are getting the best rate possible, but set limits to the number of companies you are going to consider doing business with and be careful of having your credit report needlessly and more times than is necessary!