mortgage

What are escrows & WHY did my mortgage go up?

by John Rice

Welcome to homeownership.

If you are new to this, there is a day coming in your future that happens to everybody who owns their home.

You will be having a perfectly ordinary day. Your life will be going swell. You’ve been excited because the value of your home is going up according to the zestimate, which you frequently check.

Then you go to the mailbox or check your email. You’ve got something from your lender. It’s called an escrow analysis and has a bunch of numbers all over the place. It is almost as confusing as your cell phone bill and all those stupid docs you signed when you bought your house. You have no idea what it all means. All you know is that it says your mortgage payment is going up starting in a couple of months.

There goes that perfectly ordinary day you were having.

Can they do this to you? Yes they can. Here is why and how it all works:

In case you didn’t know, the escrow account is for money you give the mortgage company within your monthly payment to budget for the property taxes and homeowner’s insurance. When those annual bills come due, the mortgage company pays them on your behalf.

Here are the reasons why your mortgage payment may increase due to escrow accounts:

1. The assessed value of the house increased. This is when the PVA looks at houses that have sold around your house and thinks the value of your house has gone up. It’s a good news/bad news thing when this happens. It means your net-worth just went up but also means you’ve gotta pay more in taxes when they increase the assessed value. You will get a letter from the PVA when/if this happens. They have the right to do so annually and there is an appeal process.

2. The tax rate increased. The amount of taxes you pay is a simple math problem. It is your assessed value multiplied by the tax rate. If your assessed value did not change but the tax rate went up…..well, you’re paying more in taxes.

3. Your homeowners insurance went up. (This is happening all over due to the crazy storms we have had.)

4. There was a shortage of funds in the escrow accounts to pay the taxes and homeowner’s insurance. 

The mortgage company collects this money over the course of the year so they have enough in the escrow accounts to pay the property taxes and homeowners insurance on your behalf. If the projected expenses for next year exceed what you are currently paying into those accounts, they can raise the amount you pay into escrow every month to make sure they have enough to pay those bills when they come due. Should you have one year when there is an excess amount left over, the amount you pay for escrow accounts could go down, making your mortgage payment less.

5. And the last reason is sometimes it can be a combination of any of the above reasons.

I sure hope this helps make sense of something that is not at all fun to deal with!

Which is better? Older or newer homes?

by John Rice

I often get asked by buyers if they should buy an older house or a newer house. My usual response is to say that it depends on what kind of problems they want to have. I get crazy looks when I say that, but it is just my way of telling them that all houses will have problems. If you don’t have one now, just wait because your newer house will become an older house quicker than you think. Basically, it is your house verses Mother Nature and Father Time……and those parents usually win.

I have lived in both older and newer houses all my life. When I was a kid, I went from a 1910ish four square to a 3-year-old ranch. Next, my parents bought a house in Kenwick  from the 1930s. My first house was built around 1915. My second was 1973. Then from 1997 and 1986, plus a collection of rentals built from the 1940s through 2006. All of them had things to deal with. 

There seems to be this misconception that old houses were built better. True, MOST were built with more care than today’s homes are. I say most because my first house, the one built around 1915, was nowhere near as well-built as my parent’s Kenwick house from the 1930s. I thought it would be, but once I moved in, I started to realize it wasn’t.

Old House misconception #2 has to do with today. Many people think that any older house is better than any newer house is today. After living in a lot of older houses and showing a bunch to my clients, I can tell you that what it comes down to is maintenance. Even the best built house from yesterday will be nothing but trouble today if somebody didn’t keep it up. Remember, an older house has been in the ring with Father Time for more rounds than a newer house will have.

Here are some of the common old house issues: Inadequate electrical, plumbing, insulation, lack of maintenance, and poorly done improvements to any of those prior items.

Newer house issues: Rushed construction by unskilled/uncaring workers sums it all up the best. I have a friend whose house was practically rebuilt after a fire. It had no insulation on one side of the house because the drywall contractors showed up before the insulation contractors were done. On my house from 1997, poor mortar joints on a brick window sill allowed water to run down the inside of the brick veneer and rot some of the sill plate. I only found it out when I did the demo for a new floor in 2010 when it was only a 13 year old house. If today’s workers would apply to their trade the same care they use to draw naked women in their potapotties, we would have the best built houses of all time!

Occasionally I do see both a really well-built newer home and a fantastic older home. I represented a builder who did a great job of making decisions that the buyer wouldn’t even begin to appreciate for years to come. He did a lot of little things way above minimum code. I also just sold an older house that had been well maintained and had recently been overhauled by a good contractor. That combination made it a pretty unique older home and a good pick…..I guess that buyer got the best of both worlds and none of the negatives!

Short term pain-Long term gain

by John Rice

I was showing one of my rental houses to a prospective tenant yesterday. This young lady said she was torn between buying and renting.

Know what I told her…..while she was standing in my house which was for rent?

I told her to buy a house if she could. I said that I think right now it seems scary and might not be any fun to have such a high interest rate, but in 5 years, she will surely look back and be glad she had bought something.

Why? Because history shows us that rates won’t stay high forever. It also shows us that prices won’t stay where they are right now forever. The odds are very strong that you will one day be able to refinance and the odds are even stronger that prices will at minimum rise slowly over time.

Also because when you are paying rent, you are paying down somebody else’s mortgage and are getting absolutely nothing in return other that getting to live somewhere for the next month. When you buy a house, at least part of your payment goes to building equity in an appreciating asset. Then, too, there is the fact that the principal and interest portion of your mortgage payment will NEVER go up, unlike your rent.

About the only time I advise people to rent is when they know they will not be in a house for more than 3-4 years. If you know you will need to move again in that short of a time, you may come out ahead by buying but the difference is so slim that it may not be worth the risk.

So pretty much, I told here that buying right now is a short term pain, but a long term gain. For her own sake, I hope she can buy a house.

Where to buy when you can’t afford the neighborhood you really want

by John Rice

Like everybody these days, I am sure you are running the numbers to see how much house you COULD have afforded when interest rates were around 3%. Quit doing that! All you are doing is making it harder to live in today’s reality of rates over 7%.

Instead of sitting on the sidelines waiting for rates to drop so you can get that dream house in your dream neighborhood, how about still buying something that has a similar vibe but will have a cheaper mortgage payment?

If you love the Tates Creek area, and I mean the part with the 40502 zip code, and you want a house built in the middle of the last century, Lansdowne is likely your dream spot to be. And for good reason. Those giant lots and large homes have been fantastic since Day 1.

But you’re looking at financing most of the $600k to million dollar plus purchase price and your wallet says “No Bueno”. What do you do? Stay where you are and be unhappy? Keep renting and get absolutely no financial gain?

No, you look in Lans-Merik since it is right across Tates Creek Road from Lansdowne. Here you will get almost as large of a lot and the houses are mostly from the 1970s but it has a similar vibe. You will end up spending between $400k to maybe just over $600k.

$400k too much? While it is technically not in the 40502 zip code, Gainesway is literally just across New Circle Road from Lans-Merik. Here you will get a 1960s home on a larger lot in the $250-400k range.

Should I buy if I know I won’t keep the place for long?

by John Rice

Back when the market was bad, I would always tell people not to buy a house unless they did not know exactly how long they would own it. If they knew they would only be in town for 2-3 years max, my advice was to rent. Same for “Kiddie Condos” too where a parent buys a condo verses renting an apartment or paying for a dorm for 4 years.

Back then the only variable was the housing market. Inflation was flat. Today is a LOT different. The value of the property AND inflation are both variables that are poised to benefit you in this situation. All the major players are predicting both housing prices to continue to rise and inflation to rise in the near future. That’s a double bonus for you and really for anybody buying any asset right now. Buy now at today’s lower price and pay it back with deflated dollars through a mortgage. It doesn’t get any better than that.

Many people seemed to enjoy my last two posts about my weight loss journey. I’m thinking I might include a little bit more stuff that’s going through my mind these days. I’ve gone through a lot of changes and unfortunately I’m now old enough to want to share my experiences and wisdom gained along the way.

Growing up, I always had a lot of anxieties. Sometimes they would be really debilitating. Couple anxiety with a mind that never turns off and it gets worse. I know a lot of people with what is now called high functioning anxiety. I am hoping this helps them.

I think two things helped me out the most.

The first was that I was able to train my mind to separate my perception of reality FROM reality. When I would get anxious about something, I would tell myself “Okay John, this is what you FEEL is happening but this is what is REALLY happening.” It sort of switched my response from being emotional to logical.

Then I realized that most things that make you anxious are either things in the past or the future. We all tend to dwell on either since I sort of feel in general, humans suck at being in the present. If I was anxious about something in the past. Maybe dwelling on some awkward social situation where I worried if I said the wrong thing, I would just try to learn from it and go on, making the next awkward situation easier……because guess what, I can’t undo the past! For future anxiety, I would just try to focus on the present and remind myself again that how I feel about it is totally different than reality and reality always wins. If it was some sort of performance anxiety, I would make whatever I needed to do as basic as possible. That seemed to make it a manageable task. I still do this if I have a super stressful day ahead of me. If I wake up and have to take 3 different clients out to see houses, negotiate a repair list, write an offer, have a closing and otherwise have a crazy busy day, I might just tell myself “All you need to do John is drive around with people and look at houses, make a few calls and do some paperwork.”

I really think like any obstacle in your life, you need to realize YOU can train yourself to control your mind and your responses to things. It isn’t easy and it isn’t quick because you are basically battling yourself. Just slowly do these two thing and you will find your anxiety level decreases.