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Rate Update and Impound Accounts

All economic data released last week reinforced the notion that the worst of the recession is behind us. The economy is currently experiencing slow to moderate economic growth with low inflation, and appears to be on track for gradual improvement. Retail Sales had their biggest monthly advance in over three years, up 2.7%. Housing Starts and Building Permits rose to their highest levels since November. Jobless Claims dropped to their lowest levels since July. Short-term inflation fears were also put to rest as both the Consumer Price Index and Producer Price Index were down compared to one year ago. The 30 Year Fixed currently sits at 4.750% (4.929% APR) and the 15 Year Fixed is at 4.250% (4.557% APR). The biggest news this week will be the Fed meeting on Wednesday which could contain information regarding the outlook for future rate hikes. New and Existing Home Sales numbers will come out later in the week. And the US Treasury will auction a record $112 billion of 2, 5 and 7-year notes.

When purchasing a new home or refinancing your existing home, your lender will undoubtedly pose the question: do you want to set up and impound account with your new loan? An impound account, also referred to as an escrow account, is an interest-bearing account set up by your 1st lien servicer into which you set aside money each month for the purpose of paying your property taxes and homeowners insurance. Each month, you pay 1/12th of your property taxes and 1/12th of your insurance in addition to your regular monthly principal and interest payment on your mortgage. Your servicer deposits these additional funds into your impound account, and from this account pays your semi-annual property tax bill and your annual insurance premium.

Most mortgage lenders offer 0.250 point pricing incentive to encourage borrowers to set up an impound account. For example, the new 30 Year Fixed loan at 4.750% that was going to cost you 1.250 points, will only cost you 1.000 point if you establish an impound account. Lenders are willing to offer this incentive because it guarantees your property taxes are paid on time and your insurance is always current. This is especially important to your mortgage company should they ever need to take ownership of the property for any reason.

Most borrowers establish impound accounts, primarily based on receiving a better interest rate and/or reduced fees. Another common reason is to break up these large semi-annual and annual payments into twelve smaller payments each month. There are also some borrowers who simply don’t want to have to worry about making their tax and insurance payments, and are content to have the servicer make the payment on their behalf. Other borrowers are resistant to setting up an impound account because they want to be more “in control of their money”. Regardless of what you decide, be sure to weigh the pros and cons of setting up an impound account before completing your next loan transaction.

Central Coast Lending, Inc.
(805) 771-9870

Written by Keith Byrd - Go to Keith's Website/Profile