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The Mortgage Professor: Escrow Can Raise Costs, but Add Simplicity

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By Jack Guttentag

(MCT)—Why did Jones pay more for his mortgage than Smith? One possible reason is that they borrowed at different times, when market conditions were different. Right now, the market is very favorable, but mortgages priced at 3.5 percent today were priced at 17 percent in 1980. There is nothing borrowers can do to affect the general market.

A second possible reason Jones paid more is that he was a less effective shopper. Borrowers have complete control over how they shop, and I have more than 50 articles on my website designed to help them on one or another aspect of the process. This is not one of them.

A third possible reason Jones paid more is that his mortgage had features that increase risk to the lender, which charges a higher price to compensate. My recent columns examined low credit scores, use of the house as an investment rather than as the borrower’s primary residence, cash withdrawals on a refinance, and high ratios of loan amount to property value. Now we’ll look at properties other than single-family houses, and waiver of the requirement to escrow taxes and insurance.

Borrowers pay more for their mortgage if the property is other than a single-family unit. A 2-unit property where the borrower will occupy one of the units will be classified as a primary residence rather than an investment, but because the second unit is likely to be rented, from a lender perspective it has some of the drawbacks of an investment property. Many tenants don’t take care of their properties as well as owners, even when the owner lives next door.

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