Home >  Lifestyle >  Homes

Saturday, March 15, 2003

By Holden Lewis, Scripps Howard News Service

Homeowners tend to fret about property tax increases, not tax calendars -- until they refinance or sell their old house and buy a new one.

Let's say you're refinancing. You might have to pay several months of property taxes out of pocket to close the loan -- even though your old mortgage's escrow account contained a similar sum, to be paid next time taxes were due.

It feels like you're paying your taxes twice (even though you're not), and it can cause a temporary cash crunch if you don't plan for it.

Your friends or relatives might tell you that it's cheaper to close in August or December or some other month because of property taxes. Maybe they're right and maybe they're wrong.

"It depends on the tax year for that state," says Janet Carletto, first vice president for LandSafe, a mortgage services subsidiary of Countrywide Credit Industries.

If you get a mortgage right before a year's worth of property taxes are due, "theoretically, they could make you pay the whole year up front," Carletto says. "It depends on the lender."

We will entrust Rich Geary, senior vice president for loan administration for ABN AMRO Mortgage Group, to gingerly escort us through this minefield.

For the sake of discussion, Geary says, let's say John Doe owes $100,000 on a mortgage. He's refinancing with another lender for $100,000 at a lower interest rate. He's refinancing in October and property taxes are due once a year, in December. Property taxes run $100 a month.

"First and foremost, the servicer wants to make sure the taxes are paid in December," Geary says. "The consumer's got 11/12ths of that tax bill in their escrow, so the servicer can make that payment after the November [mortgage] payment and once the [tax] bill is received."

Got it? Doe has built up $1,100 in his escrow account for property taxes. When he makes his November mortgage payment, $100 will be added to his escrow account, and the mortgage servicer will be poised to pay that $1,200 tax bill in December.

But Doe is refinancing in October, so he won't make that November payment.

His new lender, not the old one, will pay the property tax bill. That means the new lender needs $1,100 or $1,200 at closing, to be deposited into the escrow account and earmarked for the tax payment.

Where does Doe get that money? It depends on the policy of his old mortgage servicer.

Doe's new lender will get a payoff letter from the old lender, explaining exactly how much must be paid to close the loan. The old lender has two options:

It can request the current loan balance of $100,000, then refund Doe the $1,100 from the escrow account in three or four weeks. "In that case, the customer has already deposited $1,100 in their escrow, but because of the timing of their refinance, they have to temporarily come up with $1,100," Geary says.

The old lender can request $98,900 -- the $100,000 loan balance minus the money in the escrow account. "The servicer is reducing the amount the customer has to pay off for their existing lien," Geary says. This is Geary's company's policy. If John Doe refinances for $100,000, the new lender pays off the old lender with $98,900, then applies the remaining $1,100 to escrow for taxes.

Geary's advice: "Ask: If I were to refinance my loan, would I have to wait to get my escrow money back, or would I get my escrow money back as a subtraction of the total amount due?"

Holden Lewis writes for www.bankrate.com, a loan clearinghouse on the Web. Reach him at hlewis@bankrate.com