QDEAR BOB: I am new to real estate and am confused by the word escrow. I've heard it means closing settlement of a property sale and also that it refers to payment of property taxes and insurance. Which is correct? -- Raymond R.
ADEAR RAYMOND: Great question. Webster's Dictionary isn't helpful. Among definitions it says escrow means, "in the care of a third party until certain conditions are fulfilled, as a bond, deed, etc." Both escrow purposes you specify are correct. I prefer my explanation I give to my real estate law students: an escrow holder is supposed to be a neutral stakeholder.
In real estate, there are two primary purposes for an escrow holder. One is the third party who holds the property buyer's money and the seller's deed. The escrow holder then gives the seller's deed to the buyer in return for the buyer's cash. Of course the escrow holder does much more, such as making certain the title is insurable, recording the deed, and paying various closing expenses such as the realty agent's sales commission, appraiser's fee, transfer fees, the seller's mortgage balance, and other tasks. In many states, a settlement lawyer, bank, or title company performs the duties of an escrow holder.
The second purpose of an escrow is completely different. It refers to the mortgage lender's escrow account held for the borrower's monthly property tax and insurance premium payments. FHA and private mortgage insurance home loans require escrow accounts. Millions of other home loan borrowers prefer such escrow accounts, rather than paying property taxes and insurance premiums directly.
Each month, borrowers pay into their mortgage escrow account one-twelfth of the annual property taxes and homeowner's insurance premium along with their mortgage payment. The lender holds these payments until the property taxes and homeowners' insurance premium become due and then pays those expenses.
DEAR BOB: I am thinking about refinancing my home loan, but I have a pre-payment penalty of about $9,000. The mortgage lender says I might be able to deduct this penalty on my income tax return. Is this correct? -- Walter S.
DEAR WALTER: Yes. Home mortgage prepayment penalties qualify as tax-deductible itemized interest. But how did you get stuck with such a huge prepayment penalty? In the future, never accept a home loan with a prepayment penalty unless it has a corresponding benefit such as a low interest rate.
DEAR BOB: We are making an offer to buy a home, and our real estate agent wants us to pay a $295 "transaction fee." He said it is "standard." But we were never told about this fee before. The agent says it is for licenses, lockbox and administrative fees. What is the norm for these fees? Our agent is upset that we are trying to get out of paying this fee -- Steven B.
DEAR STEVEN: As a home buyer, you should not pay your agent any fee. He or she is well paid by receiving 50 percent of the home's sales commission. If I were you, I would fire the buyer's agent unless that transaction fee is waived. Just refuse to pay. If your agent then fails to present your purchase offer to the home seller, go direct and cut out that greedy buyer's agent who won't waive a mere $295 transaction fee.
This is known as a "junk" fee, which is 100 percent pure profit to the agent's brokerage. If your agent can't pay his or her own license fee, lockbox charge, and office expenses, that agent is misleading you. Congratulations on protesting. If that agent wants your home sale, the transaction fee will be quickly waived.
DEAR BOB: I am thankful you are a proponent of holding titles in living trusts to avoid probate costs and delays. But let your readers know they should notify their insurance company. Any property title which has been transferred into the owner's living trust needs to have that living trust listed on the homeowner's insurance policy. It should also be listed on any umbrella policy for excess liability insurance. Homeowners only need notify their insurance agent of the name of their trust to include coverage at no extra cost. I work in insurance and you wouldn't believe the number of people who fail to give us this vital information -- Erin S.
DEAR ERIN: Thank you for alerting us to the importance of notifying our insurance agents when title to our homes and other real estate assets are held in our living trusts.
DEAR BOB: We are in the process of buying a new home. The builder offered us an incentive of about $20,000 if we go with their in-house mortgage company. Is this legal? -- Caesar D.
DEAR CAESAR: It is legal if fully disclosed the builder owns or is involved with the mortgage company. But you don't have to obtain your mortgage from that firm. Shop around to compare the builder's mortgage terms with what you can obtain elsewhere.
Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.
(c) 2005, Inman News Service