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Dear Dr. Don,
I have a 30-year fixed-rate mortgage loan which closed in December 2006. I recently received a letter from my lender
after a property tax analysis announcing an increase in my monthly payment from $1,500 to more than $2,400 to cover
the shortage for property taxes.
The current loan balance is $165,000 and the home's estimated value is around $170,000. What can I do
to absorb this shortage without significantly increasing my monthly payment? My interest rate was 6.75 percent and my
credit score is 650 with a perfect record of no missed payments. Should I refinance?
-- Angel Aggrieved
Dear Angel,
The letter from your lender deals with a shortage in the escrow account. The escrow account is structured to collect
enough each month to accumulate the funds needed to pay the annual property tax bill and the homeowner's insurance premium.
If there's a shortfall -- or a projected shortfall -- in the escrow account, the lender sends a letter
listing your options for curing that shortfall. If this is expected to be a continuing problem, the long-term solution
is to raise the monthly contribution to the escrow account.
While escrow laws vary by state, lenders generally can't build excess reserves in these accounts or
arbitrarily raise escrow payments. Something is driving this increase.
A monthly increase of $900 means an additional $10,800 annually. Absent the transition from construction
to finished home, it's hard to imagine your property taxes and homeowner's insurance increasing by such a large amount.
You need to spend some time investigating what's going on with your home's tax and insurance bills. You
may find that you need to dispute your home's assessed value.
Refinancing isn't the answer, because the loan isn't the problem. The problem is with your property
taxes. I'm estimating that getting a lower interest rate on your loan (6.25 percent) and stretching your mortgage back
out to 30 years from 28 years will reduce your monthly nut by $80 a month.
But you'll pay closing fees on the refinancing that will offset some of those savings. (You can check out closing costs in your area on feedisclosure.com, a Bankrate company.) The Bankrate national average for closing costs on a conventional mortgage last year was $2,736. If those costs are representative, then it will take almost three years to recoup those closing costs from the lower monthly payment.
Despite your perfect payment history, a credit score of 650 isn't anything to write home about and you
won't get a lender's best interest rate.
If you can't afford the increase in payments, and you can't get any property tax relief, you may need
to consider selling the home. That decision raises its own set of issues. Good luck.
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