Why do we have to pay our property taxes now?
Question of the week: Why do we have to pay property taxes now?
Answer: This is a question many homeowners are currently asking. These are homeowners who are in the process of refinancing their current mortgages and will be closing between the middle of February and April. As part of their escrow closing the second-half property tax installment will have to be paid.
Property tax bills are sent to property owners in California in October of every year. Property owners are given the option of paying the entire amount owed, or pay the amount due in two installments. The first installment is due by December 10th and the second installment is due by April 10th.
One condition every lender has for funding mortgages is a title insurance policy that protects the lenders lien position and discloses any liens and claims against the title of the property. When a new loan is initiated a preliminary title report is provided for review that shows, among other items such as the legal description of the property, liens and obligations that are secured by the property. The report will show any current mortgage(s) the property owner is still obligated to pay, and what the annual taxes are and whether they have been paid or not.
Government liens take precedence over any other lien, because of this, lenders want to make sure that when they do fund a loan and record the mortgage, a trust deed in California, against the property that all property taxes are paid current as a delinquency can undermine the lender’s position. Unpaid taxes can result in a government foreclosure on a property, or if the borrower defaults on the mortgage and the lender forecloses and the property is sold at auction the taxes are paid before the lender, which results in the lender possibly not receiving the full amount owed on the delinquent mortgage.
The title company is also insuring an existing mortgage that is being refinanced, or paid off through a sale, is paid in full and no longer a lien on the property. The policy provided insures that all property tax obligations are current and the lender funding the refinance, or purchase, mortgage is in first position with no other non-government lien ahead of it on title.
This time of year, with the second half taxes due relatively soon, title companies will not issue their property unless they have proof the second tax installment has been paid. If you pay your taxes yourself then you will need to account for this amount as part of closing. You can either bring the funds to escrow, which I recommend since you have likely saved the funds to make the payment. The other option is to add the amount due to your new refinance mortgage, which I do not recommend as then you are financing and paying interest on a tax bill.
If your current mortgage has an impound, or escrow, account whereby you include a monthly pro-ration of the property taxes in your monthly mortgage payment, the issue gets a little more complicated. Most lenders pay the second half installment sometime from mid- to late March.
When we are closing refinances from early February to this period the borrower will still have to have the second half taxes paid as part of the closing. The lender will have the funds in the borrower’s impound account, but will not have paid them yet, so the borrower will need to bring the funds to closing, or add to the loan amount. When this happens, when the loan is paid off the lender will refund the amount in the impound account to the borrower after their existing loan is paid off—a process that usually takes up to two to three weeks.
As an example, the Clock’s are refinancing their existing mortgage and have an annual tax bill of $5000 per year. Every month they have included $416.67 in their mortgage payment and the lender paid their taxes when due by December 10th and April 10th. We are closing their refinance next week, on March 6th. The lender has not yet made the tax payment and has $2913.19 in the borrowers’ impound account.
In order to close the Clock’s need to transfer funds to the escrow for $2500 to cover the second half tax installment. After the loan funds, the old loan is paid off they will receive a check from their existing lender for the $2913.19 that is in their impound account that was not paid for taxes.
When all the dust settles and the accounting is complete, the borrower has not paid any more or less than what is due to the tax collector; the process however has had them pay the amount twice with a refund after closing to ensure they have only paid once.
Note, for a purchase transaction the taxes must also be paid and the amount due is pro-rated between the buyer and seller. The pro-ration is from the date of closing until the end of the tax period. For sales closing between July 1st and December 31st taxes are pro-rated on a daily basis to December 31st; for sales closing January 1st to June 30th the taxes are pro-rated between buyer and seller from the date of closing to June 30th. If you are selling a home the pro-rated taxes are deducted from your sales proceeds, if you are purchasing a home the pro-rated taxes are added to the funds you will need to bring to escrow to close the transaction.
Not paying property taxes and want to, or know someone who would like to pay property taxes? Contact me to discuss loan and home purchase options and get pre-approved for your new home.
Have a question? Ask me!
Home sales slid in California from December to January, but are up significantly from January 2019. According to the California Association of Realtors the statewide median home price was $575,160, which was down 7.7% from December and total single-family sales we down 0.7% from December. Year over year the statewide sales were up 10.3% and the median price climbed 7.4%. Drilling down to the two primary Southern California Counties, Los Angeles saw a 22.3% drop in closed sales from December to January, but overall sales were up 16.7% for the year. The LA County median home price, while down 3.7% from the prior month was up 9.1% from last January to $617,520. Next door, Orange County median single-family home price was $855,000, a gain of 1.8% from December and 7.3% for the year. Sales volume in the OC dropped 23.7% for the month and the year over year increase in sales was a very strong 22.1% gain.
Some national economic news, the second estimate for 4th quarter 2019 Gross Domestic Product was the same as the first estimate showing the economy grew at a mild 2.1% pace. The news is mortgage rate neutral. With the estimate came was the expectation that the 1st quarter 2020 GDP may not show as much growth, if any, due to possible, some say probable, economic slow down globally due to the coronavirus. This news is somewhat mortgage rate friendly.
On a more micro- level, today the U.S. Bureau of Economic Analysis released personal income and consumer spending for January. Both reports showed positive growth from December, with consumer spending rising a very modest 0.2% for the month and personal incomes increasing a very strong 0.6% for January. With income outpacing spending it is no surprise that the personal savings rate was 7.9% for the month. A key inflation index, the Personal Consumer Expenditure, rose 0.1% for the month, and is up only 1.7% for the year. With consumer spending still positive, strong gains in income and tepid inflation the news should be mortgage rate unfriendly. However….the impact on the coronavirus news and messaging, as well as how, when, if, the virus will spread through the United States with greater impact than the traditional flu, is not known and many in the media are predicting it will slow down consumer spending in the coming months.
My two cents on the coronavirus. Our daughter is currently travelling through Italy as she is on mid-winter break from her studies this semester in Grenoble, France. As you may be aware, several towns in Northern Italy have been quarantined. She and her friend were scheduled to travel to Venice, they changed their itinerary to avoid the area. Are we concerned? Yes, as parents we are naturally concerned about our daughter travelling thousands of miles away in a foreign country with a virus known to be present. Are we worried? Not that much as we know she has as much of a chance of catching the normal flu as the coronavirus. And that goes for everyone in the country. The flu is under-reported every year, not the actual numbers being provided under the actual cases, but the reporting by the media. According to the Centers for Disease Control (CDC), since 2010 influenza has caused between 9 to 45 million illnesses, 140-810,000 hospitalizations and 12-61,000 deaths annually. Those numbers are just for the United States. Every year we have a flu epidemic that is either extreme or severe with tens of thousands losing their lives as a result. The coronavirus fear is that there is not currently a vaccine and because of its unique make-up specific incidents can be tracked and traced. Meanwhile the traditional flu, which some years is immune from that year’s vaccines, is rampaging across the country as it does every winter. The CDC estimates for the current flu season to date, from October 1st to February 22nd, there have been 32-45 million illnesses, 310-560,000 hospitalizations and 18-46,000 deaths. Am I concerned about the coronavirus? Yes, as much as I am concerned about the traditional flu virus. Am I worried? Not that much. Every year up to 14% of our population gets the flu, and 0.01% die from the illness. I cannot recall any news reports from the past about the flu pandemic impacting 14% of our nation and the major economic slowdown and other impacts it has. Off my soapbox.
Rates for Friday February 28, 2020: While I am not concerned that the economy will fall apart because of coronavirus, investors are following the news and reacting in a way to not lose money, which creates a domino effect on the markets. The stock markets are down about 14.5% in the past two weeks as investors flee to safety—which means they are buying bonds and mortgages. As a result rates are down from last Friday, until (when, if) investors get a better gauge on the national and international economic impact of the coronavirus there is little to suggest rates will climb in the near future.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.125% Down 0.125%
30 year high-balance conforming 3.25% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
In an effort to become relevant in the national election scene, California has moved its primary election date from June to March. In most counties in-person voting has already started, with the official election day being this coming Tuesday, March 3rd. I have always contended that local elections have a much greater impact on our lives than statewide and national elections. Local elections determine the public safety ability, the condition of the roads and sidewalks you use on a daily basis, and the types of businesses that are able to open and be successful in your community. Unfortunately, most people only vote in local elections when they are on the ballot with national candidates, i.e. Presidential election years.
One of the greatest, I venture to say the greatest, negative impact resulting from the decline in print media is the loss of local newspapers who used to report on local municipalities and elections. Many local reporters and editors would investigate candidates, elected officials, leaders at city halls and events that impacted their cities and communities, providing valuable information. Now many municipalities operate in media vacuums, which can lead to unscrupulous actions benefiting the few at the cost to the many.
It is my hope that more people pay attention to what is happening down the street at City Hall and less to across the country in the big white buildings in Washington. Examine those representing you locally and research those who are running to represent you who will decide how many members will be in your police force, how well funded is the fire department, will there be enough money to maintain and replace streets and sidewalks as needed.
Pay attention and vote accordingly.
I’m feeling pretty soap-boxy this Friday, thank you for indulging me!
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
