11 months taxes built into loan?

Question

Doing a cash-out refi. The lender said terms would be more favorable with taxes/insurance put in escrow. Sounded good until the paperwork showed that 11 months of taxes and 10 months of insurance would be included in closing costs (resulting in a lower cash-out total than initially estimated).

Is this a normal practice? I get having to fund the escrow accounts, but it feels like the lender is trying to make me pay interest on my taxes. Do all lenders do this in cash-outs?

Stephanie Medellin · Answer

@Michael Tyler  This time of year will see the highest amounts for tax impounds because taxes are coming due (assuming you're refinancing a property in California).  Either you're going to have to pay the first installment plus a smaller # of months to establish an escrow account, or a high number of months to cover the first installment when due.  If you close in August, your first payment is not until October, so there's only one month to collect before 1/2 the taxes for the year need to be paid.  Still, 11 months is high and I have a feeling that this will probably be adjusted down a little bit.  As for your insurance, usually if the premium is coming due soon, that will just be paid in full at closing, and then a small cushion collected, but maybe it's a few months away.  That would depend on your individual policy.

If you have an impound account on your current loan, remember you will get a refund from your current lender after closing.

Chris Mason · Answer

Big picture, over-funding or under-funding an escrow account will neither gain nor cost you a dollar. They are audited annually, and if it's short you get a "surprise" bill in the mail. If it's over, you get a refund check. These are heavily regulated and not allowed to be profit centers for the lender.

Not all lenders have a "hit" for having or not having an impound account, but of those that do it's typically not more than 0.125% to fees. Meaning you get the exact same rate, but fees are $125 higher per $100k borrowed. In other words it's an amount small enough that you wouldn't even notice it unless someone told you. If fees are the minute hand and rate is the hour hand, typically 0.5% to fees/minutes is what ticks the rate/hour up a notch (in increments of 0.125% to rate).

IMO it's best to just pick based on preference (note: FHA/VA loans, it's mandatory to have it). Typically first time homebuyers like it, and typically someone on their 4th or 7th mortgage dislike it.

Jason D. · Answer

@Michael Tyler if you aren't paying anything at closing, you will likely have a large tax bill in a few months, so either way it's the same money out of pocket, just one month earlier in the case of the first lender

Michael Tyler · Answer

@Jason D. and @Dave Skow thanks for your concern, guys. We've been budgeting our rental income to pay for taxes/insurance for years now. My concern was thinking the lender was trying to earn interest income off shorting our cash-out - glad I was incorrect.

@Andrew Postell Thank you for all that detail - confirms what I thought, that they were just performing standard procedure and didn't manage expectations well in their loan estimates with me. My wife and I are not new to owning rental property, but it has been a while since we've gone through a mortgage application. I'm going to tone down the Grumpy Gus act from this point forward.

Dave Skow · Answer

@Michael Tyler if you aren't paying any escrow funds  at closing- make sure you are prepared and budget savings to pay the insurance and tax bills when they come your direction

Andrew Postell · Answer

@Michael Tyler if the property is in Texas, and you are refinancing at this time of year, then having 11 months of taxes is normal...that is IF you are ESCROWING.  If you aren't escrowing, then you will have $0 in for taxes and insurance.  It's not a lender fee, it's just if you are escrowing or not.

Now, the reason why you need 11 months, is because we pay our taxes in full at the end of the year in Texas.  So if you are refinancing now....probably 30 days to close....which means your first payment to the lender will likely be in NOVEMBER (closing in September, no September payment, no October payment...first payment Nov).  So if you have 1 payment until your taxes are due...and your taxes will need 12 payments to fund...then the lender is REQUIRED to have 11 months of payments already collected to cover your tax bill.  I hope this is making sense how I am describing it.  Honestly, your lender should have explained this IN DETAIL....so maybe they deserve to lose your business anyway.  If a lender isn't explaining their loan to it's customers then that's bad business.  But it is certainly not a lender fee to pay your taxes.  Hope this helps in some way.

Michael Tyler · Answer

Followup: Working with a different lender who matched the original lender’s terms, better closing costs, and zero months of tax/insurance built into closing to pre-fund escrow.

I guess it goes to show how wildly different the closing costs and requirements can be from bank to bank.

Michael Tyler · Answer

The property being refinanced is in Texas if that changes anything. Sounds like this is pretty standard stuff for an escrow account. We own the property free and clear and have been paying taxes on it for years, so maybe we’ll just stick with that, all other things being equal.

Michael Tyler · Answer

The cash-out amount was adjusted lower for closing costs (expected), and then downward again by about $6k for the escrow amounts. The cash-out is lower than the financed amount by about $11k total to fund the escrow account.

In my head that constitutes financing my taxes. Am I just having a bad attitude about it, or not seeing the big picture?

Alvin Sylvain · Answer

11 months does sound a bit extreme, but remember many jurisdictions (such as California) have their taxes collected on a very set schedule. I think November (December?) and April, if memory serves. So it's not like you can buy 12 months worth starting in August until next July.OK, you must missed the April deadline. November is only 3 months away, and they might not consider that to be long enough. Next April is 9 months away, which I should think ought to be reasonable.Talk to the Escrow company, see what can be arranged, or what's "normal". They are legally a disinterested third party, but they follow you and the other party's legal instructions. I can't say if there is any "interest" on the taxes, but you should have a copy of the Full Disclosure so you can check.

11 months taxes built into loan?

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