I am purchasing a house. My Bank is requiring an Escrow for real property taxes, yet I also have to pay taxes at the closing. Why do Bank’s require Escrow accounts, and why do I have to pay taxes at the closing also?
When you receive a mortgage from a Bank or Mortgage Company, it is highly likely that they will not “hold” onto your mortgage. It is common practice among Banks to “package” mortgages together and sell them. An example: The Bank closes five mortgages at $100,000.00 each at an interest rate of 3.65%. The Bank then sells these mortgages to another Company, only they sell it at $500,000.00 at 4%. They have now made a profit on that .35% of interest. When you look at $500,000.00 that’s not pennies! The new Company now services your mortgage. During the life of your loan you may actually have three or four different Companies servicing your mortgage.
Since these Company’s do not know you, and they did not take the original application from you, they just want to know that the Title is protected and that there will be no problems with the loan. To insure that there are no problems, they establish an Escrow. This is an account that you pay into on a monthly basis, that will give the Bank/Company the money to pay out the taxes on the property and also the insurance. By them controlling that aspect of the property they can be insured that the property will not be sold for taxes, without the necessity of them reading each local paper around the county to see who owes taxes. (Remember if your taxes are not paid the County will publish a list to put everyone on notice that they are starting to make a claim against this property). The Bank will also control the insurance, so that they know if there is a fire on the property they will be paid. If they did not control the insurance, they would have to track each mortgage account to insure that the insurance was in effect.
This is also why Bank’s and Insurance companies have developed PMI or private mortgage insurance (sometimes referred to as MIP). This is an insurance policy that borrowers may be required to have if they have less then twenty percent loan to debt ration in the house. (Meaning you put less then 20% down on the house when you bought it.) This insurance protects the Bank, if the borrower defaults on the loan, the Bank turns to the insurance company to pay off the loan. Now you may think that’s OK, if the insurance company pays off the loan, you don’t have to…wrong. The insurance company then assumes the role of the Bank, and will foreclose on the property. So in essence you are purchasing insurance, required by the Bank, for the benefit of the Bank, which may someday, turn around and sue you. Only Insurance companies and Bank’s could of thought of this one!
Now then the second part of your question. When you actually close on the property, you will become the owners. Therefore as owners you are responsible for all debts of the property, this includes the taxes. But the old homeowners already paid the taxes on the property, and when they paid the taxes they paid for the full year in advance, not just part of a year. Taxes run a little different than you may think. Town and county Taxes run on a annual year basis, January 1 through December 31. Village and City taxes run on their fiscal year, that being June 1 through May 31. School taxes run on a school year, July 1 though June 30 (you may ask why then do we get the school taxes in September or October, because the school must wait for the state to appropriate their share before the school can figure out how much they will need from the tax payers).
As you can see, no matter when you purchase your property, you will fall within a time frame when some taxes have already been paid. Therefore you must reimburse the current homeowner for the money they have already paid out. Escrows are for future taxes, and taxes paid at closing are for reimbursement. That’s why it seems that you are paying more at the closing.
As always this is a general answer, to a general question. You should always consult your attorney about the specific issues that surround your specific needs.
If you have a question for Attorney Kukuvka, please forward it to: Cynthia M. Kukuvka, Attorney at Law, 330 E. Main St., Palmyra, NY 14522 or e-mail to cklaw@verizon.net.