Opening an Escrow Account -Learn how It Works!!!

Taken From: www.realestate.yahoo.com

If you've ever made an informal bet with a friend, you may have asked a third person to hold the money until the wager was resolved. When you take out a mortgage to buy a home, you're doing something similar by opening an escrow account.

How it works

When you put money in escrow it is held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. The agent's role is to carry out the instructions agreed upon by both parties. The money is released when all the terms of the agreement are met. Escrow can be involved in anything from multimillion-dollar building projects to purchases made on online auction sites.

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When it's used

When your mortgage closes, your lender will usually require you to open an escrow account to cover property taxes and homeowner's insurance. You'll make an initial deposit, followed by payments to the account every month. (Usually these are added to your regular mortgage payment.) The escrow agent will then release these funds as your taxes and insurance premiums come due.

Its purpose

The idea is to protect the lender by ensuring that you pay your taxes and insurance on time. If you default on your property tax, for example, your municipality can put a lien on the house, which would make it difficult to sell. Or if your house burns down and you've neglected to pay the insurance, the lender would be left with no collateral.

How you benefit

Escrow can benefit borrowers by helping them spread insurance and tax expenses evenly over 12 payments. For example, assume your yearly property taxes are two payments of $1,000 each, and your insurance is $400 annually. If you paid these directly, it would mean three large payments a year; your escrow costs, however, would be a manageable $200 a month.

Escrow payments

Your escrow account will have a built-in cushion -- if you miss a payment, the lender must still be able to pay your accounts on time. However, federal law prohibits lenders from requiring more than two months. expenses in escrow. And because your tax and insurance costs will change slightly from year to year, the lender will review and adjust your escrow payments annually.

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When escrow may be waived

In most states, the money you place in an escrow account earns no interest for you. For that reason, many borrowers prefer to pay their taxes and insurance directly. Lenders may agree to this if your down payment is more than 20 percent, although some will raise your interest rate slightly to compensate. Once you agree to putting funds into an escrow account, however, it is difficult to cancel it, so make sure you fully understand the arrangement before your mortgage closes.

Learn the Steps for Establishing Your Real Estate Investing Criteria

Taken from: www.biggerpockets.com

Assume you are following the series of successful tips to Real Estate Investing while working full time, you know that you need full and complete support from your significant other and you need to invest time doing “The Homework” in your market.

Once you have a handle on your market and a good understanding of a bad deal, average deal, good deal and great deal, you are ready for the next step.  I suggest the next thing you do is sit down and review your homework and document your buying criteria.

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Establishing Your Real Estate Investing Buying Criteria

Let me be clear, the more specific buying criteria the better.  For Example:

• I want to get a good deal is a terrible buying criteria!
• I want to get a deal that returns 15%+ on my cash is a great buying criteria!
• I want to get something at a 20% discount.

This last one sounds like a good goal but who gets to decide the price or the discount level?  I know lots of investors use this or similar criteria.  I would argue that the criteria is too subjective and open for interpretation.  Buying criteria like this can lead you to lie or mislead yourself into thinking you have found a good or great deal.  Don’t let this happen to you.

Once you decide on your buying criteria I need you to do two things.

First, write it down and put the buying criteria in a couple of places.  I suggest putting it near the computer you do your research on.  I also recommend putting it in your wallet or purse to ensure it is always with you.  It wouldn’t hurt to put it in your car as well.

By writing it down you can hold yourself accountable and remind yourself of what you are looking for.

Second, tell your significant other.  Remember they are already on board with you, so share the buying criteria with her/him and tell them why you have decided on the criteria.  I would also share the homework you did from key #2 to ensure they completely understand the buying criteria under the lenses of the effort you have already expended.

Sharing the buying criteria with your significant other ensures they understand and they can help you hold yourself accountable.  I am a huge fan of teamwork and families working together in this business.

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A quick caveat about buying criteria:

I have one additional filter I put all my deals through to ensure I don’t get too focused on the numbers.  I use the following rule to insure I am not too numbers focused.

Would I be comfortable with my wife driving to the house during the day, getting out of her nice car and going into the house alone? 

If the house or property doesn’t pass this test, I don’t care if it is the best deal on the planet.  I won’t buy it.

I use this filter to avoid war zones.  I love buying properties in older areas and showing how much we care by remodeling the property, but I won’t take a risk in areas where I am afraid to drive and review my property.  It is just not worth it.