Are you ready for a refinance? Refinancing is often a simpler process than the initial purchase of a home, but it comes with unique challenges of its own. One of those challenges is handling how and when your property taxes are paid in the midst of a home refinance.
When it comes to the property taxes on your home, there are two important things to know:
- Property taxes are paid in two (or sometimes only one) installments for the year. This typically happens once in spring and once in fall.
- For most borrowers, your property taxes are paid through your escrow account. Your escrow account is essentially a savings account which you place money into every month for things like taxes and homeowner’s insurance.
Over the course of the year, a portion of your monthly mortgage payment is set aside for your escrow account. Having an escrow account saves you from having to make a large payment annually or semi-annually for property taxes or home insurance, breaking it into monthly payments that are more manageable. The mortgage company servicing your loan sends the money to pay your taxes and insurance for you, so you never have to remember to do it.
All states handle property taxes a bit differently. Some request taxes to be paid ahead of time – you pay your taxes for the following 6 months. Some states do the opposite – you pay your taxes in arrears for the last 6 months. These states include Indiana, Illinois, Kentucky, Ohio, and Florida.
When refinancing, property taxes paid in arrears can make things a bit more complicated, but not impossible!
If you choose to refinance in the spring or the fall, you may be caught in a “did they or didn’t they?” situation with your property taxes. For example, if your property taxes are owed on May 10 such as in Indiana, you and your mortgage company will likely receive the bill for them 45-60 days in advance of the due date. If you have an escrow account, this bill sent to you is merely a notification – your lender will take care of the actual payment. However, your lender has those 45-60 days to pay those taxes out of your account.
If you choose to refinance in April, for instance, you will have already been charged for your property taxes, but your lender may not have paid them yet. This situation is where refinancing can become problematic. The mortgage lender you choose for your refinance (if it’s a different lender), will need proof that the taxes have or have not been paid.
Getting that proof can be difficult or time consuming depending on the cooperation of your previous mortgage lender. This is where your cash to close can be affected.
Most mortgage lenders will try and keep cash to close as low as possible for their borrower. However, in cases like the above, lenders will typically assume the taxes have not been paid. This way, their borrower is not shocked and overwhelmed by the fees at closing, and can only be pleasantly surprised if the cash to close drops.
Oftentimes, lenders will roll closing costs into the refinance loan, which means their borrower does not have to pay any upfront fees. If your property taxes have not yet been paid by your previous lender, your cash to close could possibly double. Adding your property tax cost into your loan means your loan amount is raised making your monthly payment slightly higher.
If you refinance during tax season, it is best to get tax information from your previous lender during your refinance in order to keep your closing costs low. We recommend going onto your online mortgage portal and downloading your escrow transaction history to show the tax bill has been disbursed. By providing proof the tax bill has been either disbursed from escrow or the county treasurer verifies online the payment has been received your new lender will not need to collect for the current tax installment at closing.
If by chance you are unable to provide proof that the taxes were disbursed or paid to the treasurer your new lender will collect for the current tax installment at closing. Upon paying off your existing mortgage loan with your newly refinanced loan, the money set aside by your present lender in escrow would then be refunded to you typically 2-4 weeks after your refinance closing.
Is it the right time for you to refinance? Don’t let tax season stop you. A responsible lender like Ruoff Mortgage will make sure everything works out, and your refinance goals are met.