Dropping escrow may not be possible in reader’s situation
Q:
You discussed escrow in a recent column, but you didn’t say whether I could talk my bank into letting me get out of it. Do you have any advice? — P. I. A: If you were to not keep up with your fire insurance premiums and the building burned down, you’d be left with just the value of the lot. If you were to not pay your property taxes, the real estate might be seized and auctioned off for back taxes. Either way, your mortgage lender could be left with little or nothing as security for an unpaid mortgage loan. That’s why your lender wants to be sure insurance premiums and taxes are paid, and paid on time.
Many, or perhaps most, mortgage plans let your lender collect payment month by month. You send in one check to cover PITI, which stands for principal (something toward reducing the debt), interest (the past month’s interest on the remaining debt) and 1/12 of your property tax and homeowners insurance costs.
Your lender will accumulate the extra money, eventually receiving your tax bills and insurance bills and paying them for you.
In the meantime, the money is in limbo. It belongs to you, but you can’t touch it. The lender is just holding it in escrow. You should receive regular accounting and in some states, interest while the money is being held.
Your existing mortgage plan evidently requires monthly escrow payments, sometimes called reserves. You probably have a Federal Housing Administration or Veterans Affairs loan, or a conventional mortgage that didn’t require a big down payment. Your debt may have been gathered into a package with similar ones and sold to investors on what is known as the secondary market.
You can always read the fine print in your mortgage document to see whether there are any circumstances under which you could stop paying escrow and take over your own bills, but I don’t think you’ll have much luck. Q:
For me, one advantage of getting out of escrow accounts is that I can pay my homeowners insurance and property taxes by credit card. I gain airline mileage points by using the credit card versus paying by check or an escrow account, and that adds several thousand miles each year. — S. A: OK, but here’s a twist: Occasionally, homeowners in some states find that interest rates on escrow accounts were set by law years ago when rates were higher, and it’s more interest than they could currently get on savings accounts. Q:
I am buying a house on a land contract. It has been six years, and there are nine to go. The man I’m buying it from is in hospice. Where do I send my payments, and what happens if he dies? — H. W. A:
Your contract would remain just as it is. Keep sending your normal payments to the same address until you are otherwise instructed. Give it a few months, and if you don’t feel secure about the matter, then ask an attorney to investigate the person with whom you should be dealing. Q: We recently purchased a second home at a bargain, and we rent it out. The price was $170,000. We could get around $190,000 for it on the market. Our tax preparer says we need to start depreciation at $170,000. Why not $190,000? — askedith.com A:
Depreciation is pretty much an artificial figure you can take as a loss against rental income. The theory is that rental real estate is wearing out, so it’s worth less, and you’ve had a loss every year. Actually, it often does increase in value.
Landlords enjoy that welcome tax break. They can deduct depreciation at regular tax rates, saving today’s dollars on their income tax bills. They will have to recapture it some day when they sell, but they’ll give it back at lower capital gains rates and with cheaper dollars.
While there are exceptions, in general the IRS says depreciation is calculated from your cost basis for the property. Land doesn’t depreciate, so a tax preparer may deduct the value of the building lot before starting to figure depreciation. Contact Edith Lank at www.askedith.com, at edithlank@aol.com or at 240 Hemingway Drive, Rochester NY 14620.