Homeowners Insurance - Watch Your Escrow

Our Homeowner's Insurance Company is wacked. They don't seem to know what they are doing. And, my mortgage company (escrow account) can't keep up with their changes.

We contracted with an insurance company in June of 2004 for a homeowner's insurance policy. It was, of course, a requirement of our mortgage company that we make payments into an escrow account to pay the insurance premiums.

OK. That's fine. The mortgage company is making the insurance payments - accurately and on time - right?

Well, not exactly.

In July of 2005, we get a bill from the homeowner's insurance company for $29. Thinking this was a mistake since our mortgage company pays our homeowners insurance, we call the mortgage company.

They say they don't know what the bill is for, and their records show a payment made to the insurance company in May of 2005. It was paid in full (not a quarterly payment), so it shouldn't be due again until May of 2006.

So, we call the insurance company. They say it's an increase.

OK. We call the mortgage company again and tell them the insurance went up. The mortgage company says they will pay it. Just send the bill to them.

They make the additional $29 payment in July.

A few months later the mortgage company does an escrow analysis and raises our mortgage payment to reflect the increase in the insurance policy. That's fine; we were expecting the increase.

Since I'm a meticulous record keeper, I went to the mortgage company website to get a printout of the escrow analysis for my records and noticed that the $29 payment that was made in July 2005 was added back to escrow in August 2005.

What? Why did they do that, I wonder. The extra insurance bill/payment must have been a mistake, I think. Maybe our insurance shouldn't have gone up, so the insurance company issued a credit back to the mortgage company. Why else would we have a credit to our escrow account?

Now I'm watching the escrow account more closely. I see that the mortgage company makes the homeowner's insurance payment in May 2006. It's for the same amount that was contracted for originally. So, I figure (the bill and) the extra payment that was made was a mistake.

At the end of 2006, the mortgage company does its annual escrow analysis and issues a refund. According to the analysis, their projected payments from our escrow account were too high. They didn't actually have to pay as much as they thought (projected) they would, and they are refunding the overage.

So, I figure that extra $29 payment must have been a mistake. I fall back into trusted complacency again.

Oops. It was a mistake to trust that they know what they are doing. This year we get a bill from some insurance company that we have never even heard of. Upon calling our insurance agent we learn that not only has the insurance company changed its name (over a year ago), but our homeowner's insurance has gone up again.

Again? Yes. It seems that bill we received in 2005 was for an accurate increase. It has increased again for 2007.

So, I'm looking forward to another round of phone calls between the insurance company and the mortgage company. They can't get anything right.

My advice to you? Keep a close watch on your escrow account, and notify your mortgage company of any changes in your homeowner's policy. Don't, not for a second, rest assured that those two companies are keeping up to date with one another.

Ultimately, it's Your Responsibility to make sure everything is paid - accurately and on time. Don't trust your mortgage company to handle it correctly.

5 Year Balloons - Losing Your Home

My partner's co-worker is losing her home.

No, she didn't miss too many payments. No, she didn't fail to pay her real estate taxes. She just picked the wrong mortgage when she bought her home. She chose a 5 year Balloon.

A Balloon Loan is somewhat like a 30-year mortgage. Both loans have payments that are amortized for 30 years. The difference is that with a Balloon, after the specified time period is up (5 years for a 5 year Balloon, 7 years for a 7 year Balloon, etc) the remainder of the loan becomes due in full (What is a Balloon Loan).

That means that after 5 or 7 years of faithfully making your payments, you have to come up with the entire amount that is still owed on your loan. The amount that is still owed is usually a very large sum of money, because not much of the principal has been paid off in only 5 or 7 years.

Many people choose these types of loans because the interest rate is a little bit lower. They figure they will want to sell the house within 5 years, or they think it will be easy to refinance the loan if they decide not to sell the house. All too often, neither is the case, and they end up needing a huge hunk of cash.

It's not uncommon for the bank or Credit Union that holds the Balloon to decide NOT to refinance the loan. In this case, if you haven't prepared yourself you will be rushing around desperately trying to find a bank that will refinance your loan in a short period of time.

If you fail to find a bank in time, you must either pay the loan in full, or lose your home.

This is what happened to my partner's co-worker. She had no clear idea of how the Balloon worked, so she didn't research and pursue a new loan. She waited till the last minute and was shocked to find that she was not only going to lose her home, but her credit rating was going to be decimated as well - by defaulting on the loan.

My advice is to stay away from Balloon loans. With a 30 year fixed-rate loan, if you decide you want to sell the house after 5 or 7 years, you will have time to do it without the spector of doom hanging over your shoulder. And, you won't be homeless on Christmas.

Keeping up with the Jonses

Yesterday, I wrote How Big does your House need to be. There is another issue in that story that I didn't mention. That issue is Showing Off; more commonly known as Keeping up with the Joneses.

As I watched that episode of House Hunters, it dawned on me that the reason this couple wanted to move was not just because they had alot of "stuff," but also because they felt compelled to Show Off. This came clear to me as I answered the questions that kept running through my head.

What conclusions do you come to when you ask yourself these questions:

• Why would someone need a house with a formal dining room when they had an eat-in kitchen?
  
  
• Why would you need a formal living room when you have a family room or den?
  
  
• Why aren't members of a family "allowed" to use certain rooms in their houses?
  
  
• Why is it "bad" to have the TV as a focal point in a room?
  
  
• Why must we pay to heat and cool rooms that we aren't allowed to use unless company is in the house?
  
  
• Why do we spend the most money to furnish and decorate rooms that aren't meant for the people we love the most?
  
  
• Why do we feel that making an impression on a friend, co-worker, or relative is more important than our own immediate family?
  
  
• Have we bought so far into advertiser's propaganda that we now believe that our image truly is an indicator of our value?
  
  
• Have we really assimilated that message into our belief systems, and now accept that spending money to impress others is a quest that is worthy of our time, money, and limited energies?
  

The answer, for me, is easy.

I will not use any of my limited resources in an effort to impress anyone. My value lies, simply and automatically, in being alive.

How Big does your House need to be?

I was watching an episode of House Hunters on HGTV the other day. In that show, HGTV featured a couple who had 3700 square feet of space and were looking for another house because they needed more room.

"More room," I thought? "How can they need more than 3700 square feet of space?"

They had two small children, so they were a family of four. That means they need 3 bedrooms, right? Well, they needed four bedrooms. They wanted a guest room. No, maybe it was five. I think they wanted a separate home office, too.

Where does it end?

Obviously not there. They also wanted a "formal" dining room and living room. That means they need a separate "informal" eating space, and a den or family room so that they can actually sit somewhere and watch TV. God forbid they watch TV in the formal living room!

Oh, and I forgot to mention that one of the criteria for their new house was that it have a 4 car garage. They had a boat, a jet ski, and two cars.

OK, it was becoming clear to me. They needed more room because they had alot of stuff.

Now, obviously, it's not up to me to tell people how many "things" they should buy. If they have the money to buy and maintain boats and jet skis and cars, that's their choice.

But, when you think about it, you begin to see just how expensive these things become. Think about it - These people had to buy a bigger house because of their things. I would say that significantly increases the cost of these things.

How much are you willing to pay for a boat, and a jet ski, and two cars? Is an additional $50,000 for a bigger house with a 4-car garage too much? If we divide $50,000 by 4 we get $12,500 added to the cost and maintenance of each item.

I don't know how much this couple paid for their boat, jet ski, and two cars, but that extra $12,500 puts them in the way-too-high category, in my opinion.

This show illustrates a question that I think we all have to ask ourselves. How many "things" do we really need to buy?

When do we finally have enough?