Financing

Mortgage statements come in many different forms. however, most contain similar terms and information. here are some commonly used terms and their definitions that may help you better understand your mortgage statement.

adjustable-rate mortgage (arm) — a mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the loan. these types of loans usually start off with a lower interest rate but can subject the borrower to payment uncertainty.

amortization — the process of paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero.

balloon mortgage — a mortgage loan that requires a large payment due upon maturity (for example , at the end of ten years).

collections — the efforts a lender takes to collect past due payments.

convertible arm — is an adjustable rate mortgage loan that can be converted into a fixed-rate mortgage during a certain time period.

deed — a legal document under which ownership of a property is conveyed.

deferred payments —loan payments that are authorized to be postponed as part of a workout process to avoid foreclosure.

delinquency — failure to make a payment when it is due. a loan is generally considered delinquent when it is 30 or more days past due.

equity — ownership interest in a property after liabilities are deducted.

escrow account —an account where a homeowner’s regular installments to cover taxes and home insurance are held in trust until due.

escrow analysis — a periodic review of escrow accounts to make sure that there are sufficient funds to pay the taxes and insurance on a home when they are due.

fixed-rate mortgage — a mortgage loan with a fixed interest rate that remains the same for the life of the loan.

forbearance — the lender’s postponement of legal action when a borrower is delinquent. it is usually granted when a borrower makes satisfactory arrangements to bring the overdue mortgage payments up to date.

foreclosure — the legal process by which a property may be sold and the proceeds of the sale applied to the mortgage debt. a foreclosure occurs when the loan becomes delinquent because payments have not been made or when the borrower is in default for a reason other than the failure to make timely mortgage payments.

foreclosure prevention — steps by which the servicer works with the borrower to find a permanent solution to resolve an existing or impending loan delinquency.

hazard insurance — insurance that is generally required under mortgage contracts to pay for loss or damage to a person’s home or property.

home equity line of credit — a way of borrowing money against the equity in one’s home to pay for things such as home repairs, college education, or other personal uses.

interest-only mortgage — a mortgage where the borrower pays only the interest and none of the outstanding principal balance on a loan for a specified amount of time.

investment property — a property not considered to be a primary residence that is purchased in order to generate income, profit from appreciation, or take advantage of certain tax benefits.

lender placed insurance — insurance placed on a home or property by a lender to protect their interest in the collateral which secures the loan.

mortgage insurance — insurance that protects lenders against losses caused by a borrower’s default on a mortgage loan. mortgage insurance (or mi) typically is required if the borrower’s down payment is less than 20% of the purchase price.

mortgage — a legal document that pledges property to a lender as security for the repayment of the loan. the term is also used to refer to the loan itself.

refinance — the process of replacing an existing mortgage with a new one by paying off the existing debt with a new, loan under different terms.

repayment plan — a borrower promises to pay down past due amounts on a mortgage while continuing to make regular monthly payments on a home.

servicer — a firm that works on behalf of the lender in support of a mortgage, including collecting mortgage payments, ensuring payment of taxes and insurance, managing escrow accounts, managing communications with the borrower, and loss mitigation or foreclosure when necessary.

title — the documented evidence that a person or organization has ownership of real property.

work out — a way to resolve or restructure a loan to prevent someone from going into foreclosure through a loan modification, forbearance or short sale.

Refinancing involves paying off your current mortgage and replacing it with a new mortgage. it often involves many of the same steps and expenses that were required when the original mortgage was obtained.

the most common reason to refinance is to lower monthly mortgage payments, but there are other reasons to consider refinancing.

reasons to refinance

lower the monthly payment: if interest rates have dropped, refinancing may lower your mortgage payment. this is the primary reason people refinance.

reduce the term (length) of the mortgage: a drop in interest rates may allow you to shorten the amount of time you pay the mortgage but leave the mortgage payment about the same.

reduce the risk on an adjustable rate mortgage (arm): an arm mortgage may have enabled you to afford your home but if the interest rate has increased significantly, evaluate a fixed-rate alternative. the risk of further interest rate increases is then eliminated.

use the home’s equity: as an alternative to a home equity loan, you may elect to refinance your home for an amount greater than the remaining balance of your mortgage. this is known as a “cash out” loan.

consolidate debts: an owner with outstanding loans or credit card balances that have high interest rates can consolidate these loans into one new mortgage.

should you refinance?

whether or not to refinance depends on your own personal financial situation. there are many mortgage options available — examine each option thoroughly. depending on your situation, the best option may be to do nothing at all.

points to consider:

do you have the funds that refinancing may require to cover up-front costs and fees?
refinancing your mortgage may require you to pay substantial up-front costs and fees. if you do not have enough money to pay the up-front costs completely it may be possible to finance some of the up-front costs by including them in the new mortgage.

how long will it take to recover the costs of refinancing?
the rule of thumb is that refinancing costs are recovered within 2-3 years. if you plan to sell the house or pay it off shortly, you may not want to refinance because you will not recover the costs. obviously, this depends on the up-front costs and the savings with the new mortgage.

has your income increased substantially?
if your income has increased substantially you may be able to afford higher monthly payments. this may allow you to shorten the term of your mortgage. if the prevailing interest rate is lower for the shorter term mortgage, refinancing is a good option. alternatively, you may prefer to make larger principal payments against your current mortgage.

is your current loan an adjustable rate mortgage (arm)?
if the current rates for fixed-rate mortgages are the same or slightly higher than the rate for your arm, refinancing may make sense.

much thought needs to go into the refinancing decision — re-evaluate this decision regularly to account for changes both in your financial situation and the economy. perhaps your decision is not to refinance now; if it makes since to do so in a few years it may save you thousands of dollars.

Reverse mortgages are for senior citizens who own homes and want monthly income.

who qualifies?
you must be at least 62 years old and have equity in your home.

you have equity in your home if your home is worth more than you owe on it.

here’s how it works
when you bought your home, the bank loaned you the money to buy it and you paid them back with monthly mortgage payments.

a reverse mortgage is the opposite. with a reverse mortgage, the bank pays you a monthly payment from the equity in your home.

you repay the money when you sell your home, refinance, permanently move out, or pass away.  at that time, you or your heirs must repay the loan plus interest in one payment.

how do i get a reverse mortgage?
reverse mortgages are available through most major banks and lenders.

here’s what happens when you contact the lender:

• an appraiser will determine the value of your home.
• the lender will tell you how much you qualify for based on your age, the equity in your home, and the cost of the loan.
• you decide how you want to receive the money.  you can receive the money:
  • as a lump sum
  • in monthly payments
  • as a credit line that lets you decide how much of the loan to use, and when to use it
• you sign a contract. the contract will outline the payments you will receive and the amount you have to repay including interest.

maintaining your reverse mortgage
to keep your reverse mortagage in good standing you must:

• pay your property taxes on time
• maintain and repair your home
• have homeowner’s insurance

your lender can end the reverse mortgage and require immediate repayment if you:

• file for bankruptcy
• rent out part of your home
• add a new owner to title
• take a new loan against your property

things to consider
reverse mortgages are more costly than typical home loans or home equity credit lines. they also have higher interest rates and fees. interest is charged on the outstanding balance and is added to the amount you owe each month. this means that your total debt increases each month.

keep in mind that you are borrowing equity from your home. this means fewer assets for you and your heirs.

shopping for a reverse mortgage
shop around and get offers from several lenders. you should compare the terms, and look for a loan with the lowest interest rate, points and fees.

title insurance is usually required by the lender to protect the lender against loss resulting from claims by others against your new home. in some states, attorneys offer title insurance as part of their services in examining title and providing a title opinion. the attorney’s fee may include the title insurance premium. in other states, a title insurance company or title agent directly provides the title insurance.

owner’s policy.
a lender’s title insurance policy does not protect you. similarly, the prior owner’s policy does not protect you. if you want to protect yourself from claims by others against your new home, you will need an owner’s policy. when a claim does occur, it can be financially devastating to an owner who is uninsured. if you buy an owner’s policy, it is usually much less expensive if you buy it at the same time and with the same insurer as the lender’s policy.

choice of title insurer.
under respa, the seller may not require you, as a condition of the sale, to purchase title insurance from any particular title company. generally, your lender will require title insurance from a company that is acceptable to it. in most cases you can shop for and choose a company that meets the lender’s standards.

review initial title report.
in many areas, a few days or weeks before the settlement or closing of the escrow, the title insurance company will issue a “commitment to insure” or preliminary report or “binder” containing a summary of any defects in title which have been identified by the title search, as well as any exceptions from the title insurance policy’s coverage. the commitment is usually sent to the lender for use until the title insurance policy is issued at or after the settlement. you can arrange to have a copy sent to you (or to your attorney) so that you can object if there are matters affecting the title which you did not agree to accept when you signed the agreement of sale.

coverage & cost savings.
to save money on title insurance, compare rates among various title insurance companies. ask what services and limitations on coverage are provided under each policy so that you can decide whether coverage purchased at a higher rate may be better for your needs. however, in many states, title insurance premium rates are established by the state and may not be negotiable. if you are buying a home which has changed hands within the last several years, ask your title company about a “reissue rate,” which would be cheaper. if you are buying a newly constructed home, make certain your title insurance covers claims by contractors. these claims are known as “mechanics’ liens” in some parts of the country.

survey.
lenders or title insurance companies often require a survey to mark the boundaries of the property. a survey is a drawing of the property showing the perimeter boundaries and marking the location of the house and other improvements. you may be able to avoid the cost of a complete survey if you can locate the person who previously surveyed the property and request an update. check with your lender or title insurance company on whether an updated survey is acceptable.

An escrow is essentially a small and short-lived trust arrangement. it has become almost an indispensable mechanism for the consummation of real property transfers and other transactions such as exchanges, leases, sales of personal property, sales of
securities, loans, and mobilehome sales.

definition:
california civil code section 1057 provides this description of an escrow:
“a grant may be deposited by the grantor with a third person, to be delivered on the performance of a condition, and, on delivery by the depositary, it will take effect. while in the possession of the third person, and subject to condition, it is called an escrow.”

essential elements
the two essential requirements for a valid sale escrow are a binding contract between buyer and seller and the conditional delivery of transfer instruments to a third party. the binding contract can appear in any legal form, including a deposit receipt, agreement of
sale, exchange agreement, option or mutual escrow instructions of the buyer and the seller.

escrow holder
an escrow holder is the depositary, agent, or impartial third person having and holding possession of money, written instruments, or personal property to be held until the happening of designated conditions. (once these conditions are met and performed the
escrow agent is generally released from liability.) according to financial code section 17004, “escrow agent” is any person engaged in the business of receiving escrows for deposit or delivery.

the escrow holder acts to ensure that all parties to the transaction comply with the terms and conditions of the agreement as set forth in the escrow instructions. the escrow holder may also coordinate the activities and professional services involved in the transaction, such as the activities of the lender and the title company as well as those between the buyer, seller and broker.

instructions
the conditional delivery or transfer is accompanied by instructions to the escrow holder to deliver the instruments and funds respectively on the performance of the stipulated conditions. there are two forms of escrow instructions employed: bilateral (i.e., binding on both buyer and seller) and unilateral (separate instructions of buyer and seller). since the escrow instructions implement and may also supplement the original contract, both are interpreted together if possible. if, however, the instructions contain terms in conflict with the original contract, the instructions, constituting the later contract, usually control. when instructions have been signed by the parties to the escrow, neither party may unilaterally change the escrow instructions. the parties may, by mutual agreement, change the instructions at any time and one party may waive the performance of certain conditions, provided the waiver is not detrimental to the other party to the transaction.

while an escrow holder can be held liable for violating written instructions, the escrow holder is really only a stakeholder, not legally concerned with controversies between the parties. as such, an escrow holder is entitled to file an action of interpleader to require litigation of controversies.

complete escrow
properly drawn and executed escrow instructions become an enforceable contract. an escrow is termed “complete” when all the terms of the instructions have been met.

escrow principles
the following are major escrow principles:

1. escrow instructions must contain mutuality and the understanding of the principals to the escrow. properly drawn instructions are clear and certain as to the intentions of the parties, the duties of the escrow holder, and the fact that it is the principals themselves who must perform the escrow contract by complying fully with the instructions. the escrow holder does not have, and must not exercise, discretionary authority.
2. the escrow holder does not act as a mediator or advisor, or participate in customer controversy, or arbitrate disputes. instructions are drawn so that the parties to the escrow make the promises, perform, and put the escrow holder in a position to close the escrow.
3. the escrow holder is prohibited from offering legal advice and must suggest that disagreeing parties consult an attorney (or real estate broker if it is a transaction matter that may be negotiated).
4. escrow is a limited agency relationship governed by the content of the escrow instructions. as agent for both parties, the escrow holder acts only upon specific written instructions of the principals. when the escrow is closed, the escrow holder becomes agent for each principal with respect to those things in escrow to which the parties have respectively become completely entitled.
5. when all parties to the escrow have signed mutual (identically conforming) instructions, the escrow becomes effective. if only one party has signed, that party may terminate the proposed escrow at any time prior to the other party’s signing.
6. the escrow holder must avoid vague or ambiguous terms and provisions in instructions and documents.
7. the escrow holder must forward immediately to the title company any document which is to be recorded and furnish a copy to any concerned party, so that the document’s sufficiency can be determined. this will help avoid delay in closing escrow.
8. documents and funds not contemplated by the escrow instructions should not be accepted by the escrow holder without authorization of the principals.
9. the escrow trust account must be maintained with extreme care. overdrawn accounts (debit balances) are strictly forbidden.
10. escrows are confidential in nature. the escrow holder must not give out any information to third parties concerning an escrow without approval of the escrow principals.
11. the escrow holder is the agent of the principals to the escrow. legally, any facts known by the escrow agent are imputed to the principals. any detrimental or new material information, previously undisclosed, made known to the escrow holder and affecting the principals should be disclosed to them for their instructions in the matter.
12. the escrow holder must maintain a high degree of trust, efficient customer service, and good customer relations.
13. the escrow holder must remain strictly neutral, not favoring either party. the escrow holder must not advise either party, as any gain to the one will likely be detriment to the other.
14. the escrow holder must maintain records and files on a daily basis, to be sure that a procedure is not overlooked. neat and orderly files, complete with check sheets, will help insure smooth progression toward closing.
15. before closing an escrow, the escrow holder must audit the file, accounting for all items to be handled, recorded and delivered, including cleared funds.
16. the escrow holder must not disburse any funds from an escrow account until all items such as checks, drafts, etc. have cleared, and thus have become available for withdrawal. this “holding period” may range from 1 to 10 days, depending on the type and location of lender.
17. closing and settlement must be prompt, using forms which are simple and clear.

general escrow procedures (may vary according to local custom)
basic escrow procedures include the following:

1. 1. prepare escrow instructions on the escrow holder’s printed form. all principals to the escrow sign instructions which fully set forth the understanding of the parties to the transaction. usually accompanied by an initial deposit. for a home purchase, the mutual instructions of the principals set forth:

• the purchase price and terms;
• agreement as to mortgages;
• how buyer’s title is to vest;
• matters of record subject to which buyer is to acquire title;
• inspection reports to be delivered into escrow;
• proration adjustments;
• date of buyer’s possession of the property;
• documents to be signed by the parties, delivered into escrow, and recorded;
• disbursements to be made, costs and charges and who pays for them; and
• date of closing.

2. order title search on the subject property, resulting in a “preliminary report” from the title company. the escrow holder examines this report carefully for items not contemplated in the escrow instructions. the seller must clear any such item or it
must be brought to the attention of the buyer “for information” and “expression of desire in the matter.”

3. request demands and/or beneficiary statements from any lenders of record. the necessary document will be:

• a “demand for pay-off” if an existing loan is to be paid in full through escrow

or

• a “beneficiary statement” if buyer is purchasing “subject to” or assuming a loan.

4. accept structural pest control report and other reports (such as plumbing or roofing inspections) into escrow and obtain, as instructed, any necessary approvals from the parties in connection with the reports/inspections. hold the reports (and any funds associated therewith) for delivery to the proper party, or recording, at close of escrow.

5. accept new loan instructions and documents if the buyer is obtaining new financing. obtain buyer’s approval/execution of the documents. satisfy all lender’s instructions prior to using the lender’s funds to complete the transaction.

6. accept fire insurance policies and complete settlement by:

• accepting and delivering any fire insurance policy and transferring the insurance if so instructed by the parties;
• making all prorations (e.g., property taxes and insurance) as instructed by the parties;
• completing the accounting (settlement) details and informing the principals that escrow is ready to proceed.

7. request closing funds. the law prohibits disbursal of funds from an escrow account until all items such as checks, drafts, etc. have cleared and become available for withdrawal.

8. audit file in preparation for closing by:

• accounting for all funds (cash reconciliation statement) and documents;
• determining that the parties have complied with all escrow instructions.

9. order recording by authorizing the title company to run the seller’s title to date and record the necessary documents, provided no change has occurred in the seller’s title since issuance of the preliminary title report.

10. close escrow, after confirming recording, by:

• preparing settlement statements for buyer and seller;
• disbursing all funds; and
• delivering documents to the party or parties entitled thereto.