The rules and amount vary widely from state to state, but everyone pays property taxes. In fact, this is usually the main source of local government funding and is generally based upon the home’s value. How these taxes get paid is often a source of confusion to homeowners, particularly.

The first question you might ask is why lenders even care about taxes. The reason is that unpaid property taxes are a superior lien to the rights of the lender. If a lender gets the property back through foreclosure, there are almost certainly going to be unpaid property taxes. The lender is going to have to pay. Lenders don’t feel that this is their job, and I don’t blame them.

That’s why almost every loan contains a provision that you will pay the property taxes when due and that the failure to pay the property taxes is an “event of default.” This means that if you are delinquent on taxes, your lender could, theoretically, foreclose on your property even if you have been making all of your mortgage payments on time.

How would the lender know this? You probably don’t remember this, but when you signed your loan documents there was a charge of about $75 for “Tax Service.” This pays for a third-party company whose business it is to go to all the County Offices in the country some period of time after taxes are due and to get a list of all delinquencies. They then notify your lender that you are late! The lenders seldom foreclose based upon your failure to pay taxes, but you can be assured that they will write you a “strongly-worded” letter reminding you of your obligations.

The strange situation is that a far larger number of people than you might believe – I have heard that the number is over 30% in some areas – do not pay their taxes on time. I am fairly certain that a really small number, some fraction of 1%, actually lose their homes because of failure to pay taxes, but that doesn’t mean that lenders don’t care.

Let’s assume that you are a lender that is servicing 3,000,000 loans. (Servicing is the terminology for collecting payments and managing the loan.) Let’s say that only 10% of people don’t pay their taxes the next time they are due. That’s 300,000 letters you’d have to write! The postage alone is $117,000. You’d need a pretty big department to handle that. Not only that, they now have to check to make sure that you paid it when they get your letter saying that you did pay it. Lenders/servicers don’t get paid for that.

That’s how the idea of the impound account, or escrow account as it’s called in many areas, came up. In order to prevent this costly exercise that they don’t get paid for, an important issue from their perspective, they invented the idea of you paying one-twelfth of your taxes every month along with your regular mortgage payment. Then, when the taxes are due, they send a check to your County Tax Collector. I think that they even save postage because I’m sure that most large counties can now accept electronic funds transfer.

The huge objections to this were always that, “The bank has my money and they don’t pay interest,” and “They keep a lot more than they need.” Many states – I am not sure how many – now pay interest on the impound balances, although it’s not much. Heck, these days you wouldn’t even earn that much if you kept it in a savings account.

The other aspect – how much they are allowed to keep – is now governed by Federal law. They are allowed only a small cushion and are required to calculate the balances and return to you any more than the mandated maximum.

In most Eastern states, lenders are used to having these impound accounts and state laws protect their rights to demand that you have one. However, the laws in other states are more consumer-friendly. In California, for example, a lender can require impounds only where the loan is greater than 90% of the value of the home when they did the loan.

It’s not like all aspects of impound accounts are bad. Those Eastern lenders didn’t like it when they came out to California to do loans and were told that they couldn’t have impounds. So they started offering quarter-point pricing incentives. That’s $1,000 reduction in fees on a $400,000 loan. I can guarantee you that it is worth $1,000 to let them do it for you.

Also, many homeowners like the convenience of never having to worry about paying the tax bill. In California, taxes are late if not paid by December 10th – right when you need extra money for Christmas – and April 10th – right when your income taxes are due. Not good timing!

Like most things in life, there are plusses and minuses. I think you have more important things to worry about.

If your neighborhood is anything like mine, the red-hot real estate market of last year is starting to cool off. Homes that would have sold in hours a year ago are now sitting on the market much longer. If you are selling, you will want to consider ways to make your home more attractive financially.

For most buyers, financing is a crucial part of their decision regarding which home to buy. The fact is most buyers can’t afford to pay cash for a home, so a key issue will be whether they can afford your home and the payments that buying it will require. That question is even more relevant in today’s environment of higher home prices and rising interest rates. Here are some points to consider:

Offer Owner Financing: If you have a lot of equity in your home, you may be able to offer to “hold financing” in the form of a second mortgage for your buyer. That means the buyer will get a mortgage from a traditional lender for, say 80% of the purchase price, and you will set up a payment plan with them for the remaining 20%. By collecting the full price of your home plus interest as the loan is repaid, you can actually end up with even more money from your sale.

Sounds easy, but there are caveats. “Secret seconds” that are kept off the records are a form of mortgage fraud, and I don’t recommend you consider any side financing deals that are not above board. The lender that will be financing the for your buyer must approve the deal, so run your financing proposal by a mortgage professional first to make sure it is acceptable. Then use a real estate attorney or a service such as Circle Lending to properly set up your loan and ensure it is recorded in the public records.

Spell It Out: Ever notice how loans for everything from cars to jewelry focus on “low monthly payments?” Prospective homebuyers may not have taken the time to investigate financing before they started shopping, and may have no clue the payment options available for a home in your price range. A mortgage broker or loan officer will likely be more than happy to create a financing sheet that details payment options for various types of loans; after all, it gives them the chance to get in front of prospective customers.

Help Out: If coming up with cash at closing will be a problem for your buyer, you may be able to help by contributing toward the closing costs and/or participating in a down payment grant program such as the Nehemiah program , Neighborhood Gold or AmeriDream. Consult with a mortgage professional to find out what types of closing costs you can help pay, and how much you can contribute. Some lenders, for example, will limit contributions from the seller to 3% or 6% of the sales price, depending on the amount of the down payment.

Lower Their Payments: You may be able to offer to pay discount points for your buyer. Points lower the interest rate the borrower pays, and can make their payments more affordable. Again, run it by a mortgage professional first.

Make It Easy: For $300 — $500, you can offer to pay for a home warranty, which will help ease your buyer’s worries about costly home repairs the first year. Your real estate or mortgage professional can give you information on companies that offer home warranties in your area. Since you don’t have to pay for the policy until your home sells, it should be a no-brainer.

Don’t Waste Time: Ask your buyers to get pre-approved for financing before accepting their contract. This helps you avoid wasting time tying up your home with borrowers who can’t qualify for a loan.

Buy Upgrades: You may be able to include an allowance for upgrades or repairs in your deal. You may also offer to pay homeowner or condominium dues, or a special assessment for a certain period of time.

And a final warning: Do not list your home for sale if you think you might want to refinance it if it doesn’t sell. Most lenders frown on refinancing homes that have been recently listed.

When homeowners purchase their first home, their equity is small. The only equity may be just the initial down payment, which is perhaps only 5% or 10% of the value. Or it maybe nothing, as is the case with people who bought with “no money down” in the recent days of profligate lending.

During the next 30 or so years, equity increases as a result of appreciation in property value and by slowly paying down the mortgage balance. A worthy goal for many people is to maximize their home equity by the time they retire. In fact, for many people, building equity in their home is a simple and relatively painless way to increase their net worth.

Indeed, for those who have modest retirement benefits, building substantial equity holds the key to a successful retirement. This series will focus on developing strategies to assure, first, that you maximize your equity in the manner most suitable for your situation, and second, to consider how you can use equity to further other purposes you may have.

Building Equity after Buying

Whatever equity you started out with, it is important to build it quickly. At the current date, mid-2007, we have come to the end of a period of spectacular increases in real estate values. Lots of homeowners were beneficiaries of this. Today, you can’t count on that and equity may have to be built the old fashioned way — by paying for it!

At some point in time you may want to sell your home and buy another one. It will be important to be able to take as much equity as you can with you to your new home. This isn’t easy when you start out having to pay a 6% real estate commission. Don’t assume that you can sell without a broker. You may get lucky, but maybe not!

If you bought your home with no money down, you have to scratch up 6% equity just to get out with no money. With normal amortization on a 30 year loan, the mortgage balance won’t have been paid down to 94% of its original value until after 4 years have passed. For those who got the popular Interest-Only loans, they never will get there!

Bottom line: You need to manage your mortgage debt by paying it down so as to meet your objective. I know that all borrowers stretch in making , particularly on their first home, and here I am talking about increasing the monthly payment. But that’s reality and you need to deal with it. If you get lucky, we’ll see renewed appreciation and you’ll get a little help.

There are many calculators on the Internet that can help you figure out a plan to meet your objectives. Try the ones at http://www.mtgprofessor.com/calculators.htm

Building Equity for Retirement

Your Sure Fire Happy Retirement Plan is to pay off your mortgage the month you retire. Your income will drop when you retire, but when you also eliminate the largest expense item in the budget, retirement can be a joy.

However, one of the funny things about time is how quickly it passes. All of a sudden, you’re 60 years old and you “forgot” to make those extra principal payments you talked about and you still have a hefty mortgage balance. Owning your home free-and-clear, as the expression goes, sound pretty good. With a plan, you’re likely to achieve your goal, so let’s talk about goals and planning.

To achieve this goal, you must start years earlier. You’ve seen the examples that show the advantage of starting to contribute to your 401(k) in your twenties rather than later in your career. The mortgage payoff plan is no different. Ideally, the plan should be implemented when you are just entering your fifties, if not before.

Your income is close to its peak and your expenses are down after launching your kids. You’re comfortable with your monthly mortgage payment but you now have more disposable income. That’s the time to increase your payment to a level that will have the loan paid off at a specific time in the future. Let’s work through an example.

Say you and your spouse are 47 years old and you want to have your mortgage paid off when you are 63 years old, 16 years into the future. Let’s assume that you got a 6% $250,000 30-year loan seven years ago. The payment is $1,499 per month. The current balance is $224,088 but if you don’t do something different, it wouldn’t be paid off until you were 70. By increasing the payment to $1,818 per month, you can reduce the length of the loan to 16 years. In addition, because you’ve paid the loan down faster, you save a total $64,500 in interest over that 16 year period. All that went to paying down the principal faster.

Sometimes you can hasten this process by refinancing. In the next article in this series, we’ll explore the costs and benefits of refinancing and discuss how you can decide if it makes sense for you.

Summary:

• Building equity in a home is a great way to increase your net worth.
• Building equity to have portable wealth to take with you is important.
• Owning your home free-and-clear when you retire is a great goal.
• Paying off your mortgage faster is a great way to build net worth.

There is a difference between the way the political folks in Congress think the world works and what really happens where the rubber meets the road. In this case, I am talking about programs instituted under various plans designed to help the housing market recover. I’ll discuss the first one here.

The first programs are designed to help people with loans with above-market interest rates and high loan-to-value percentages to refinance into lower-cost mortgages. The idea is that with the declining values in so many areas, many homes were “under water”to the point where the owners could not refinance under normal rules that require the homeowner to have equity in the property.

The total loan-to-value that would be allowed was a generous 105 percent. This meant that if a home had a loan on it that started out at 80 percent loan-to-value (LTV), if the value went down so that the home was worth even less than the current value of the home, Fannie Mae or Freddie Mac would still do a new loan if they owned the original loan and the LTV was at 105 percent or below.

Importantly, no private mortgage insurance (PMI) would be required, even if the LTV exceeded 80 percent. If the original loan had been over 80 percent LTV so that PMI was required, the existing PMI policy would stay in effect. Theoretically, these programs allowed a lot of homeowners the opportunity to get lower rates and strengthen their financial position. That would be good for the economy.

The program was greeted with enthusiasm in the press, warmly by the public, and coldly by lenders who were slow to introduce it. The most immediate shortcoming was that a homeowner could refinance only the principal balance of the 1st mortgage Trust Deed (TD). Many people had seconds, mostly Home Equity Lines of Credit (HELOCs). Most people would have liked to combine both loans into one new one, but the program would not allow that.

It also became clear that 105 percent LTV was on the skinny side and that there were just not that many people in that narrow niche who would benefit. So Fannie and Freddie made the program more generous, allowing loans up to 125 percent LTV.

So what happened? First, it is important to understand that everyone who originates a loan ultimately sells it to Fannie Mae or Freddie Mac, perhaps through an intermediary. I might do a loan with XYZ Mortgage Banker who would sell the loan to Citicorp who would sell it to Fannie or Freddie. All transactions are governed by contracts that obligate a lender to “buy back”a loan that was granted fraudulently. That’s okay.

But with paranoia about loan quality being rampant, the contracts now contain very loose language that allows a lender to require a buy back even if there is no “good reason.”You can’t just tell the next guy up the chain that you won’t buy the loan back. You need them, and if they cut you off, you’d be out of business.

Additionally, everyone started inserting additional quality control people into the system. It turned out that when you take a newbie, train him on some narrow aspect of the business, and put him to work on loans that have just been bought, he may find errors. I’m not talking about BIG errors, like someone started doing loans fraudulently or well outside the program parameters that would cause future losses. I’m talking about little itty-bitty clerical “failure to check the right box”errors, usually on perfectly good loans.

We did an $180,000 loan on a $1,900,000 property, less than 10 percent LTV. That loan would NEVER go bad. In my book the “checkers”should never even look at loans like this; they should only look at loans where the possibility of actual loss is higher, like on 95 percent LTV loans, for example. But the lender kicked it back for a trivial reason that we were able to fix quickly. But had we not fixed it, there would have been a big loss.

The specter of having to buy loans back places more risk on retail lenders than they want to assume. It has led to somewhat of a paralysis in that some lenders will now no longer do loans over 80 percent LTV. Their thinking is that if they funded a loan under these expanded parameters and someone made them buy it back, they would have to have PMI on it to sell it to someone else, and you can’t do this after the fact because the borrower has to pay it.

Not only that, but many of those lenders who are still willing to do 105 percent loans never picked up on the 125 percent LTV loan limit. They kept their maximum at 105 percent.

Bottom line: This program that was supposed to help million of homeowners has actually been helping only a small fraction. It’s like the other programs announced in Washington, like the loan modification programs that were abysmal failures. One was supposed to help millions but attracted fewer than 1,000 applicants during the last quarter of 2008.

My purpose in writing this is to alert homeowners to shop carefully for mortgages under these programs. You might very well meet all the program parameters, but if you go to the wrong lender, one that hasn’t adopted the full program, they will tell you that you don’t. Obviously, this is the first question to ask. It may also make sense to use the services of a mortgage broker who will have relationships with a number of lenders. They will know which lenders are doing what you need.

In the future, I will discuss similar problems with appraisals and disclosures, problems that are a result of the government meddling in the process with new rules that not only don’t help, but that are actually harming consumers.

I am a great believer in owning real estate. It’s the best way the average family has of accumulating wealth. In fact, for many people who are at or nearing retirement age, the equity in their homes may be larger than their 401(k) balance. The secret, of course, is that our wonderful mortgage credit system has allowed you to purchase over a long period of time.

Imagine what our economic system would be like if you had to accumulate the entire purchase price of whatever you bought, be it a home or car or another large asset. Paying for such things over a period of time makes the whole system work. Equity build up is slow but dependable. For homes, unlike other assets, the value increases over time.

For people who already own their homes, there are terrific potential wealth benefits of owning rental property. It may be the difference between a really comfortable retirement and one that’s not quite so comfortable. Again, the trick is to buy a property and have a succession of renters pay off the loan over time. If you plan it properly, when you retire the mortgage will be paid off and the entire rental income minus operating expenses will come to you. And you’ll have a significant asset to your name!

Many real estate fortunes have been helped significantly because home investors have been able to purchase when values are at some cyclical low point, as they are now in many markets. You can certainly buy properties “at market value” and still make money over time. But you can do even better if you are able to buy at a discount. Effectively that means you can lock in a profit.

You can also choose when to take that profit, maybe never if you hold onto the property and it becomes part of your estate.If you buy at a lower price, you can get a lower mortgage which requires less of a monthly payment and can be paid off faster than if the purchase price were higher. You can make money when other landlords are just breaking even.

How do you get started?  Well, as a writer, I suggest that you buy a couple of books on buying, owning, and managing income property. The one I recommend you start out with is Property Management for Dummies by my friend Robert Griswold. There are a number of other books on the topic, but this one will get you familiar with the process.

This is a complicated field that has more than its share of pitfalls. There are sellers who want too much for their property who may disguise what might be wrong with it or who may be untruthful about rental income and expenses…. and on and on.

There are tricks that the professionals know but which the amateurs don’t. Here’s one: Statistics demonstrate that properties, particularly small apartment complexes, on busy streets have a higher occupancy rate than those on side streets. You might think that people don’t want to live on streets that might be noisier or busier, but when the FOR RENT sign goes up out front, more people see the sign and the properties rent faster. A week or two more rent every year can really add up over the years.

Everyone who has ever managed rental properties will tell you stories about the bizarre things that renters do, from lying about their likelihood of paying rent on time to intentionally destroying property when they leave. For example, I managed an apartment complex during a time in the 1970s when the price of beef skyrocketed. One of our tenants tried to raise a calf in his bathtub, where he permanently tethered the poor animal. We evicted him, but not before the calf had ruined the tub.

Investing in a home — and doing it right — consists of learning about the process and then aligning yourself with professionals in your market area who can help you. Ideally, you’ll create a partnership that will last a long time. When you are successful, you’ll be a repeat client for these professionals.

Let me also suggest what not to do, which is to spend $500 going to a weekend seminar on how to become a millionaire. For a classic case of how not to do it, read this story of a young flipper.

Now, having read that, don’t be scared. Just realize that success can be yours if you don’t go about it the way this fellow did.