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Hi all,
I'm mulling over a potential refi and am hoping to get some clarification on an issue regarding the quoted balance that's higher than my existing balance. Some quick background info on my existing loan: I am 3 years into a 30 yr fixed mortgage (original amt = ~250k) and have an escrow account funded by a portion of my monthly payment and utilized to cover the annual county tax and homeowners insurance premium.
The refi GFE provided by the agent shows a new 30 yr mortgage w/ a lower rate, an obligation to establish a new escrow account, and a higher balance than my current unpaid principal balance (UPB). When questioned about the components of the balance increase, the agent explained that it is comprised of the current UPB, daily interest, and fees (all three aforementioned items summing up to the Payoff amount provided by my current lender, which I have verified), as well as my existing escrow balance. The escrow piece is where my confusion lies - why would the balance of my escrow account, which is essentially an asset since I have funded it from a portion of my own monthly payments, now contribute to my debt, since it has been added to my new UPB that I am obligated to pay to the lender? My understanding of the escrow process involved in a refi is that my current lender will write me a check for the contents of my escrow account. I could then use those monies to fund the new escrow account established with the new lender. I don't see how this amount would contribute to adding to the balance of the new refi loan.
I would appreciate thoughts from anyone experienced with this topic. Thanks!
The escrow account being referred to is the new one not the exisitng one. Your refund from your current lender comes about 30 days after funding so if you stated that you don't want to bring funds to closing this is the only way to meet you stated goal.
This is how funds due at closing sre calculated:
Payoff/ Sales price
+ prepaid items(interim interest and escrow account setup)
+ Closing costs (could be a credit depending on rate/fee structure selected)
- new loan amount
- any seller credits in a purchase
= funds due at closing.
I always reccomend that if you have documetable assets to bring the funds required to set up your escrow account to closing as you will reecive them back in about 30 days instead of paying interest for 10/15/20/30 years.
In other words, the existing escrow will come directly to you, in a month or so, but you must reestablish that same amount (+/-) in a brand new escrow account, and that happens before you get that old escrow so they are figuring that you are wrapping it into your new loan.
It's actually a wash then. If you wanted to and have the money you could establish the new one with money out of your current pocket, rather than finance it. And then your pocket is replenished when your check arrives from your previous bank.
In other words, the existing escrow will come directly to you, in a month or so, but you must reestablish that same amount (+/-) in a brand new escrow account, and that happens before you get that old escrow so they are figuring that you are wrapping it into your new loan.
Quote:
Originally Posted by dad2jules
I always reccomend that if you have documetable assets to bring the funds required to set up your escrow account to closing as you will reecive them back in about 30 days instead of paying interest for 10/15/20/30 years.
I understand the desire for the bank to establish a mechanism to ensure the borrower funds the new escrow account. However, as dad2jules pointed out, the increment to the post-refi balance in the amount of the existing escrow account means that amount will earn interest that the borrower is obliged to pay. From one perspective, it seems the lender is forcefully extending additional dollars on the loan and benefiting from the accrued interest. Is this not an accurate depiction of the situation? Assuming the borrower doesn't fund the new escrow account at closing, I would understand if the post-refi monthly payment (PITI) rose to contribute to the new escrow, but I don't see the justification in raising the post-refi balance so that the borrower is "penalized" to pay interest on that amount.
The treatment of this issue seems similar to how unpaid interest/principal on a modification becomes capitalized into the new, higher loan balance. In that case the justification for doing so seems more apparent as the borrower had amounts due and wasn't able to meet the obligation. However, in this case, the original escrow account was funded on time by the borrower, yet he/she must pay interest on it. Not sure I see the logic in that.
Thanks!
Last edited by bender_bot; 11-12-2012 at 08:10 PM..
I understand the desire for the bank to establish a mechanism to ensure the borrower funds the new escrow account. However, as dad2jules pointed out, the increment to the post-refi balance in the amount of the existing escrow account means that amount will earn interest that the borrower is obliged to pay. From one perspective, it seems the lender is forcefully extending additional dollars on the loan and benefiting from the accrued interest. Is this not an accurate depiction of the situation? Assuming the borrower doesn't fund the new escrow account at closing, I would understand if the post-refi monthly payment (PITI) rose to contribute to the new escrow, but I don't see the justification in raising the post-refi balance so that the borrower is "penalized" to pay interest on that amount.
The treatment of this issue seems similar to how unpaid interest/principal on a modification becomes capitalized into the new, higher loan balance. In that case the justification for doing so seems more apparent as the borrower had amounts due and wasn't able to meet the obligation. However, in this case, the original escrow account was funded on time by the borrower, yet he/she must pay interest on it. Not sure I see the logic in that.
Thanks!
The original escrow account was funded by the borrower but it was funded on a different loan usually with a different lender. That lender no longer has the loan and has to return the money to you, the new lender is seen as a 3rd party and has no right to that money. To create new accounts the new lender is going to need basically the same amount in the escrow accounts as the old lender, so you have the choice to either bring that money to closing (which is the best option if you have the funds easily available) or you can add the money to the loan in order to insure the escrow accounts have the funds to pay your taxes and insurance on time.
One other option I recommend when my borrowers need to keep the cash reserves or do not have easy access to the money for their escrows is for them to add the escrow cost to their loan, then when they get their escrow refund to turn around and make a principle payment on the new loan for the amount of their refund. If you follow through (which from what I can tell only about half actually do) then that additional amount on your loan is only there about 30 days, meaning you are only paying interest on it for a month or so.
I understand the desire for the bank to establish a mechanism to ensure the borrower funds the new escrow account. However, as dad2jules pointed out, the increment to the post-refi balance in the amount of the existing escrow account means that amount will earn interest that the borrower is obliged to pay. From one perspective, it seems the lender is forcefully extending additional dollars on the loan and benefiting from the accrued interest. Is this not an accurate depiction of the situation? Assuming the borrower doesn't fund the new escrow account at closing, I would understand if the post-refi monthly payment (PITI) rose to contribute to the new escrow, but I don't see the justification in raising the post-refi balance so that the borrower is "penalized" to pay interest on that amount.
The treatment of this issue seems similar to how unpaid interest/principal on a modification becomes capitalized into the new, higher loan balance. In that case the justification for doing so seems more apparent as the borrower had amounts due and wasn't able to meet the obligation. However, in this case, the original escrow account was funded on time by the borrower, yet he/she must pay interest on it. Not sure I see the logic in that.
Thanks!
The lender is not forcing you to "extending additional dollars on the loan and benefiting from the accrued interest." It is more of a default as most borrowers don't want to bring any cash to closing. You can simply inform your lender to lower the loan amount and you will cover the new escrow out of pocket. You could take this further and pay any closing costs out of pocket as well. You could take that further and throw in a principal reduction as well.
Also, the lender does not typically benefit from the interest on the higher loan amount as most mortgages are sold to Fannie/Freddie. The interest is all forwarded to them and not retained by the lender.
Appreciate the responses. This clarified a lot for me. I do have to say that from the borrower's standpoint, it seems a bit "unfair" to have to pay interest on the escrow portion of the higher loan amount, regardless of whether it ends up with the new lender or some other entity in the secondary market. I would think a more appropriate solution would be to treat it as a non-interest bearing portion of the balance, although I suppose this kills a bit of the leverage the servicer has on incentivizing the borrower to keep up to date on the escrow payments.
That aside, I'll surely be applying the contents of the original escrow account as principal to the loan as soon as the old lender cuts the check.
Last edited by bender_bot; 11-13-2012 at 08:44 AM..
Appreciate the responses. This clarified a lot for me. I do have to say that from the borrower's standpoint, it seems a bit "unfair" to have to pay interest on the escrow portion of the higher loan amount, regardless of whether it ends up with the new lender or some other entity in the secondary market. I would think a more appropriate solution would be to treat it as a non-interest bearing portion of the balance, although I suppose this kills a bit of the leverage the servicer has on incentivizing the borrower to keep up to date on the escrow payments.
That aside, I'll surely be applying the contents of the original escrow account as principal to the loan as soon as the old lender cuts the check.
I would say it is 0% unfair. No one says a borrower has to or should roll it into the new loan. The loan amount is the loan amount and interest will be charged on it. There is no way Fannie/Freddie should be providing dollars to fund someone's escrow account and not collect interest on said funds.
Add in, unless you are over 80% loan to value you don't have to escrow at all. Problem solved.
As TimtheGuy said, it's not really unfair, because you have the choice of whether to pay for it upfront (no interest), or not pay for it (roll into loan and pay interest). No one makes you do the latter.
It's not really the lender's fault if you don't have liquid funds at closing to pay for the new escrow balance. But no one's going to give you free money for it.
And also, as jwiley mentioned, if you really feel irked that you're not allowed to use your old escrow funds to pay for the new, then as soon as you get your refund from the old funds, immediately apply it to your new balance. One month's interest on newly funded escrow reserves is in the single digits for dollars. Not a huge deal.
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