“You promised me a fixed rate!” The voice on the phone had the edge of barely concealed anger. “I got a fixed rate last year because I wanted a payment that wouldn’t change. Now they’ve gone and raised it 75 bucks! What are you going to do about it?”
We had helped Ralph Vanderplatz buy his first home the year before. He had made the minimum down payment required for the FHA loan we had arranged for him. It was a 30-year fixed rate with FHA mortgage insurance—and impounds. This meant that he paid his taxes, insurance and mortgage insurance to the bank as part of his mortgage payment.
The bank placed the portion of his monthly payment that went to cover his property taxes and homeowner’s insurance into a separate account called an “escrow account” or “impound account.” They would pay the taxes and insurance from that account as those items came due.
Ralph bought his home from an older gentleman who had owned it for three decades. His property taxes were very low—but when the home changed hands, the taxes went up to reflect the higher value.
Just as with other government functions, the adjustment of the property taxes doesn’t happen quickly; it takes several months or more. I was getting the picture of what had happened in Ralph’s case.
Your fixed rate won’t change, but property taxes may
“Did you by any chance get a refund check from the bank last year?” I asked.
He thought for a moment. “Matter of fact, I think I did. Almost a thousand bucks. The wife and I had a nice little weekend getaway on that money. Why do you ask?”
I explained to him that banks analyze the impound accounts they hold for their borrowers every year. This is to make sure they are not over- or under-collecting for taxes and insurance. In Ralph’s case, they had looked at the old tax bill from the previous owner, concluded that they had collected too much money for taxes, and sent what they thought was the surplus back to Ralph.
When the new tax bill—the one reflecting the higher value—arrived at the lender’s facility, they dutifully paid it. In doing so, they “overdrew” the impound account. When they discovered that shortage (it may have taken several months), Ralph had to make up the shortage. So they sent him a letter (which he probably thought was junk mail and threw away) telling him about the shortage.
They would have given him the choice of writing them a check for the shortage—which may have been close to a thousand dollars—all at once, or stretch it out over a year. The payment for the mortgage alone never changed. It was just the lender’s handling of taxes and insurance.
Paying off a shortage is temporary
Once Ralph concluded that I was not, in fact, Satan incarnate, he asked me what he should do. A $75 increase in his payment was a slight hardship. I suggested that he call the lender at the number showing on his monthly statement and ask them to stretch out the time frame to reduce the payment increase. He called me later to report that the bank had agreed to increase the payment just $30 per month. That was manageable.
How can you avoid what happened to Ralph? First, be aware of how lenders initially calculate property taxes when you first buy a home. They use a “rule of thumb” based on a typical tax rate and the purchase price. This is only an estimate. You can ask your Realtor® or your loan officer (us) to check on the actual tax rate for that property. This way, you can be sure that you will be paying the bank the actual taxes with your monthly payment, rather than an estimate that could be too low.
Then, if the bank sends you a refund check, resist the temptation to spend this windfall money. Call their customer service number and explain that they may have made a mistake sending you the refund check. The chances are they’ll thank you profusely and ask you to rip up the check. That will avoid that increase in your payment to make up for the bank’s mistake.
The only downside is that you’ll have to pay for your nice weekend out of your own pocket.
If you have questions about a change in your mortgage payment or anything related to a mortgage, please feel free to contact us today!