I had to bump this from the letters page because it is that important.
Most people who are looking at this site either have bad credit now or had bad credit in their recent past. Bad
credit usually results from one of three things:
1. Tramatic economic disruption. This can be a divorce, loss of a job or the failure
of a business.
2. Credit Card Addiction. It is as real as alcoholism and as destructive to families
as well as credit reports.
3. Mortgage default. When you are a month late on your mortgage the lender doesn't
want the late payment he wants it all. When you go 90 days late you get a letter telling you that you will be foreclosed
on if you don't pay up. While it may look like you are being warned of Foreclosure for credit purposes you are
in Foreclosure. This is a death knell to your credit. It is worse than a Chapter 13 Bankruptcy by leaps and bounds.
This is your worst case scenario and half of the time the reason for this default is .... escrows.
Escrowing can increase your monthly payments by as much as 30% which can be a significant
amount if you are close to maxing out your monthly budget. Most people build their budget around the mortgage
payment so this burden is assumed and planned for. Yet when a freak disruption in income comes along, even for
just a couple of weeks, this payment becomes the biggest hurdle for the family financier to overcome. When people
say that they are "one paycheck away from disaster..." they are talking about missing their mortgage payment.
Clearly making this crucial payment smaller can make each month less stressful and gives you
a buffer to weather the occasional financial crunch. This can provide you with piece of mind that you will take
to work and share with your children. However, their are greater dangers to beware when escrowing.
Property taxes never go down. It just works that way. However they do go
up with regularity. Each time a municipality reassesses your home they change the amount of taxes necessary. If
you tax bill comes in higher than the amount your bank has been withholding the bank sends the correct amount to the taxer
and then "corrects" you withholding to reflect the changes. Usually these corrections result in your escrow payments
being increased dramatically. Often a 10% increase in your property taxes will result in your escrows doubling over
the next twelve month period.
"Usually these corrections result in your escrow payments being
increased dramatically. Often a 10% increase in your property taxes will result in your escrows doubling over the next
twelve month period."
When your mortgage payment goes from $700 a month to $1000 a month you going to face some
sticker shock. Maybe you have to choose not to pay a utility bill ... or three. Maybe you can't
cut the check this month so you put it off until next month. But next month you aren't making any more money and instead
of paying a $700 bill you are faced with coming up with $2000. At the end of the month the money just isn't
there but you send them a check anyway hoping it will cash ... but it doesn't. The next letter you get from
the mortgage company is certified and it is telling you that in addition to owing them $3000 you also need to come up with
another $4000 in legal fees to staive off Foreclosure. However the fact is you are already in Foreclosure, you
are now in imminent danger of losing your home, your equity and any hope for good credit within the next seven years.
This is how bad escrows can mess up peoples lives and it happens to hundreds of people every single day.
As a mortgage broker I can attest that more people approach me about refinancing their loans
to correct escrow problems than any other single factor. Unfortunately once the problem becomes evident, it is
usually too late to refinance. This is a problem that must be addressed before it's too late.
Nobody likes paying the tax man but the fact is he is our most flexible debtor.
If you are late paying your taxes you will pay a penalty but that penalty usually buys you several months to catch up.
If a crisis comes up in January you might have three or six or eight months to worry about your taxes even being late and
at least a year before those taxes can threaten your property and credit. However that same crisis in January
can start damaging your credit in February and threaten your property by March.
Escrowing does not mean that you are paying your taxes earlier. In fact escrow accounts
often do fail to pay timely and sometimes at all. When this happens it is you, the home owner, who has to make everything
right with your time and money. Escrow accounts are really you lending banks money to hold and invest with zero
interest. Any fees are owed by you, not to you. The only beneficiaries of escrow accounts are banks
who can play with your money and tax collectors who let banks do their dirty work.
If you are like most Americans you fill out and submit your tax returns every January so as
to get a fat tax refund as soon as possible. Starting nest January, take that refund an use it to pay off your
property taxes. Perhaps this means you won't have an excuse to overspend on your credit cards in December, but
you shouldn't in the first place. Perhaps this means you won't be able to prepay for that summer vacation you
wanted, but if you can't afford it, how important is it? Give yourself a vacation every month when you open your
lower, monthly mortgage bill.
