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Most lenders use escrow account for taxes, insurance

Q: Our purchase offer was accepted, and we are excited about moving into our new home. But we have a question about our monthly mortgage payment. It’s more than we figured because of escrow. We have a good record of paying our bills, but the bank says it will collect every month and keep track and pay our taxes and insurance. Is this really a requirement, or can we pay by ourselves? We would appreciate a prompt answer, as we close next week. — D. S.

A: If your property insurance premiums weren’t paid up to date and the house burned down, the lending institution — the bank — would be left with nothing but a vacant lot as security for the loan.

If your property were ever seized and sold at auction for unpaid back taxes, the bank would end up with no security for your debt. That’s why the bank wants to be sure those bills are paid as they become due.

Your credit record may be perfect, but lenders are seldom free to make exceptions. In most cases, lenders plan to bundle your debt with others and sell it on what is known as the secondary mortgage market. This frees up more cash so they can continue to make local loans. The secondary market has its own standards.

The term “escrow” refers to the status of that extra cash you’ll send each month. It doesn’t belong to the lender, and it doesn’t belong to the insurance company or the local property tax office. It’s still yours, but it’s in escrow — being held and ready to be released to pay future bills. You will receive regular accountings so you can keep track.

In addition to each month’s estimated share of the expenses, your mortgage company is allowed to hold an extra two months’ worth as a safety measure. In a few states, you’re entitled to receive interest on the money being held.

You can expect changes to your monthly mortgage bill over the years if it turns out the amount being collected is not enough or too much. Again, you’ll receive explanations. And some day, when your mortgage is finally paid off, anything left in the escrow account will be returned to you.

Renters insurance

Q: My daughter is away at college. Our neighbor says she should have tenants insurance. Have you ever heard of this? — askedith.com

A: Your daughter’s landlord has insurance on the building, but it doesn’t cover her belongings. If she has valuable computer equipment, musical instruments and the like, a tenants insurance policy is relatively inexpensive.

Property management experience

Q: I would like to add to that question about renting property out instead of selling when moving out of state.

Your reader may wish to consider property management by a professional. I have four rentals in Colorado that I purchased when I lived there. I have them managed. The fees are 9 percent of rents collected, $75 for an annual walk-through inspection and $50 for a lease renewal fee. The managers take care of things and contact me ahead of large expenses. I get an email statement every month along with copies of bills and a transfer to my checking account.

They are experienced in all issues, including evictions and fair housing laws. I am happy with the service. I make 6 to 8 percent after all expenses. Since they only get their commission on rents, they have incentive to keep renting to good tenants. Additionally, since I am a senior, I will leave the properties to heirs with tax advantages at that point.

Of course, this works best if the property is free and clear. Your reader should consult an accountant. — K. B.

A: Thanks for the report on your experience. Real estate investment takes constant effort. The landlord must be ready in case of, say, a 6 a.m. phone call saying a water heater has burst — they’d have to buy a replacement promptly and make sure someone is there to meet the plumber that day. That’s difficult to handle long-distance. And it’s a burden for any inexperienced neighbor, friend or relative who might offer to look after the property.

For would-be real estate investors, it’s wise to make a first venture within half an hour of one’s own home. And for anything out of town, yes, professional management is usually a must.

Contact Edith Lank at www.askedith.com, at edithlank@aol.com or at 240 Hemingway Drive, Rochester NY 14620.

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