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Down & Up Payments

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Posted On: 03/28/2012

QUESTION:

I obtained a 30-year, fixed-rate mortgage in 2008. Six months after closing I was notified of a severe shortage in my tax and insurance account. I am now in default. My taxes and insurance have consistently declined and the property value has dropped, yet my monthly payment has gone up. How is this possible?

ANSWER:

With a fixed-rate mortgage you have a set monthly payment for the life of the loan, say $1,000. If you buy with less than 20 percent down the lender also collects money each month for property insurance and property taxes. Maybe you now are paying $50 per month for insurance and $150 per month for taxes. The tax and insurance money is kept in an “escrow" or trust account.

While the total monthly cost for principal and interest does not change with a fixed-rate loan, the cost for taxes and insurance may go up or down. In most areas property taxes have declined along with property values.

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Some jurisdictions collect property taxes twice a year, say half of $2,100 in June and half in January. Your lender may have estimated the required tax payment incorrectly or not collected the proper amount at closing, thus the need to increase your monthly payment.

For instance, the real tax cost may have once been $200 per month but it is now $175 per month. Even though the monthly cost has gone down it's still more than the lender was collecting ($150).

You must pay your taxes and insurance in full, otherwise the mortgage is in default.

Please contact an attorney immediately. An attorney will check with the property records office and your insurance broker to see how much is owed and then deal with the loan servicer. Although you're in default, a sensible mortgage investor would rather have the taxes and insurance brought current then face the losses associated with a foreclosure.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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