Mortgage Payments & Mortgage Escrows
Homeowners are not just responsible for their principal and interest payments on their mortgage loan balance but are also responsible for their property taxes and homeowners insurance. Every year, property taxes and homeowners insurance is due. Also, many homeowners belong to a homeowners association. Homeowners associations charge an annual homeowners association fee and do have the power to lien your property and go after homeowners who do not pay their homeowners association fees. Your principal and interest payments are due on the first of the month and no later than the fifteenth of the month to your mortgage lender. The 15 days is given as a grace period by most mortgage lenders. Any homeowner who pays their mortgage payment past the 15th day of the month is normally assessed a late payment charge. Real estate property taxes are collected and due to the county where your property is located. The homeowners insurance is due to your homeowners insurance company.
Monthly Housing Payment: Principal, Interest, Taxes, Insurance
One of the main factors a mortgage loan underwriter will take into consideration when qualifying a mortgage loan applicant for a home loan is what the homeowner’s principal, interest, taxes, and insurance will be. Principal, Interest, Taxes, and Insurance is known as PITI and is extremely important because it is used to determine whether the mortgage loan borrower has the ability to make timely monthly housing payments on the income they make.
How Is PITI Calcuated
A mortgage loan borrower’s principal, interest, taxes, and insurance is calculated as follows:
- The borrower’s monthly principal payment
- The borrower’s monthly interest payments which is calculated from the interest rate on the term of the mortgage loan
- The borrower’s annual property tax assessment divided by 12 months
- The borrower’s annual homeowners insurance bill divided by 12 months.
Adding the above four items will yield the monthly principal, interest, taxes, and insurance or PITI.
Mortgage escrows is when a mortgage lender will collect your property taxes and homeowners insurance along with your monthly mortgage payments and pay the property taxes to the county and pay your homeowners insurance to the homeowner insurance provider when it is due. Mortgage lenders prefer to have mortgage loan borrowers have mortgage escrows because they want to protect their interests. If a homeowner is behind on their property taxes, the government can place liens on the subject property. In the event if the home is destroyed due to a fire and the property is not insured, there is no coverage and the mortgage lender loses its collateral. By having mortgage escrows, the mortgage lender will make sure that the property taxes and the homeowners insurance is paid and paid timely.
Mortgage lenders require home buyers to pay one year’s homeowners insurance upfront at closing and it is part of the home buyer’s closing costs. Mortgage lenders will also collect two months of homeowners insurance payments and six months of property tax payments upfront and set up the home buyers mortgage escrows. Mortgage loan borrowers who have mortgage escrows are offered a discount on closing costs. Mortgage loan borrowers waiving escrows will normally be charge a 0.25% ( charges may vary depending on mortgage lenders ) for not having mortgage escrows.
How Can A Home Buyer Waive Mortgage Escrows?
If you are a FHA insured mortgage loan borrower, VA mortgage loan borrower, or USDA mortgage loan borrower, you cannot waive mortgage escrows. However, if you are a conventional loan borrower, you can waive mortgage escrows if you have at least 20% down payment and your loan to value is at least 80% LTV.