I am an absolute retard as far as anything involving the language of money is concerned. I don’t understand understand Wall Street, and terms such as “futures trading” and “money laundering” may as well be ancient Chinese to me.
I bought my house 3 yeras ago, and lately I’ve been getting a lot of offers setting up an Home Equity line. Apparently, because I’m paying mortgage, somehow I am actually making money in the process and it’s called Escrow. At least I think that’s what it means.
Dictionary.com defines “escrow” as Money, property, a deed, or a bond put into the custody of a third party for delivery to a grantee only after the fulfillment of the conditions specified. The definition leaves me more mystified than the question.
Anyhoo, the bank called me up and set up an appointment to talk about this escrow thing, and threw a lot of terms at me. The only thing I understood is that I’d be getting a Crown account, free checking, no card fees, interest on my checking, and increased interest on my savings. I said OK.
In the meantime I’ve been getting offers from my insurance company and other banks in the mail. More numbers that I don’t understand. So I signed some papers with my present bank. As I understand it, my line of credit just went up and I can also borrow against my escrow, or was that withdraw from my escrow? I’m not sure. I also signed something that said some landscaping company did a flood assessment of my property, and I didn’t even know they did it.
I’m not the type to borrow money anyway. I’m too paranoid about missing a payment or something.
What is the bank getting out of this? Why are all these financial institutions salivating over my escrow? What IS my escrow?
Escrow = account that your mortgage company makes you pay into so that they can pay your homeowner’s insurance, property taxes, and PMI, if applicable. The amount you pay into escrow should equal these expenses every year (with some voodoo calculations done so you don’t have a negative escrow balance at any time) and you will usually get a statement at the end of every year that will show you what was paid out and paid into the escrow, and make an adjustment in the escrow portion of your mortgage payment to cover that. You shouldn’t be able to use your escrow as collateral for any loan.
Equity = “profit” on your house. The difference between what you owe on the house and what the house is worth is your equity in the house. For example, if you get a mortgage for $100K, and pay down $10K of it, and the market value of your house rises to $130K, you have $40K in equity on your house. Banks will be happy to offer you what is essentially a mortgage on this equity, in the form of a Home Equity Loan or Home Equity Line of Credit (HELOC). The difference in the two is based on how the loans are disbursed and paid back.
Banks love to offer Home Equity Loans because they can make a decent interest rate on the loan (and occasionally closing costs and origination fees) and the loans carry a stable form of collateral.
When you make a monthly mortgage payment you are making principal + interest payments. However, every year you do have to pay your property taxes and home owners insurance. Instead of watching your savings and putting the money into a savings account that draws interest so you can pay these each year, the bank gives you the option to include payments toward these each month that gets tacked onto your mortgage payments. Of course the banks like this because they get to sit on this money till the property tax and insurance bills come due. That’s why their offering you stuff like free checking, etc. to do it.
Equity loans are a seperate entity all together and they aren’t free money. You still have to pay them back with interest (although lower interest than typical loans and the interest is tax deductible in most cases). Bascially when your house is worth more than what you owe on it, it is seen as collateral and the bank is willing to loan you money based on this. Again, not free money.
If your house is worth $150k and you owe $100k, when you sell you will profit $50K. But if your house is worth $150K and you owe $100K on it and have $50k in home equity loans, you won’t be making any money.
Be careful. Although you are not the type to borrow money, it sounds like you just applied for a loan. What is the bank getting out of it? Even if you never borrow money on this line of credit, the bank has probably made a bit of money just on fees. I suggest you check on that. A home equity loan isn’t a bad thing to have, but if you really have no need for one then why pay any fees?
The city put a water and sewage line through my front yard last year. It caused my property value to go up. So aktep’s explanation of equity explains why I became a hot property so to speak.
Well, I assume the bank rep has some degree of honesty. The main 3 questions I asked were, “Do I have to pay anything? Will I be billed anything? Will I make any money?” No, no and yes.
I wouldn’t assume too much here. Much of the skill involved with dealing with banks has to do with knowing exactly the right questions to ask. Lots of loopholes here. You might ask “Are there fees?” to which they say “no.” Of course, when it turns out there is a “usage charge” or a “maintenance assessment”, what do you say then?
You know already that you don’t get this stuff. Locate a friend or family member who does, and bring them along to ask questions before you sign anything else. Trust me.