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

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By Jack Guttentag

On 3 and 4-unit properties, lenders view the risk as even greater, and as shown in the table below, they charge more than on a 2-unit property. Further, at loan-to-value ratios, or LTVs, higher than 80 percent, they won’t make loans on 3- and 4-unit properties.

Condominium mortgages may or may not cost more than a mortgage on a single-family unit, depending on the LTV and the financial as well as physical condition of the condominium project. The owners of condo units face a risk that owners of single-family units do not have. They are responsible for maintenance of the grounds and buildings, which means that the failure to pay condo fees by some owners imposes a greater financial burden on the others. Ordinarily this is not a problem, but it has become a problem in some projects in recent years.

If condo fee defaults in a development become too high, lenders may refuse to make any loans on units in that project. I have received some anguished letters from condo owners unable to refinance or to sell because of such a lender freeze.

Borrowers with 2-4 unit houses can’t do anything to control the mortgage price except to shop carefully. Prospective condo purchasers, on the other hand, can and should assess the risk posed by the condo project by examining its financial status, with particular emphasis on condo fee defaults by existing condo owners.

Another element of cost is escrow. Lenders generally require borrowers to include taxes and insurance premiums in their monthly mortgage payments, which are placed in escrow until the payment date when the amount due is paid by the lender. Mortgages are priced on that assumption. If you want to control the taxes and insurance yourself, you can request a waiver of escrow, which will cost you about one-quarter of a point — or $250 for each $100,000 of loan amount.

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