Tax Accounts
Tax arrears to the municipality take priority over a mortgage. As such, lenders are very concerned that property taxes are up-to-date at all times. In order to ensure this happens, many lenders will make it a condition of their mortgage commitment that they will collect taxes as a part of the mortgage payment, and remit to the municipality when due.
How does this work? From the homeowner’s standpoint, it is very simple. If the taxes are estimated at $1,800.00 per year, the lender will collect an additional $150.00 per month with the mortgage payment and maintain a tax account on behalf of the client. Therefore, if the client’s normal monthly mortgage payment of Principal and Interest would have been $750.00, the lender will actually collect $900.00 per month. $750.00 will be used to pay the mortgage, as indicated above. The other $150.00 will be put into a separate tax account, to accumulate until the tax payment is due.
Tax Holdback
Tax payments to the municipalities are usually due in six installments (three from the interim bill and three from the final bill). Depending on the size of the lending institution, it is more cost effective to pay the interim and final bills when they arrive. (It is more cost effective to make two payments than the cash-flow benefits would provide). As such, there must be enough money in the tax account to pay each portion of the bill when it comes due. Tax bills are usually due in March and July. If your transaction closes in December or January, there may not be enough in the tax account to pay the tax bill when it comes in. The lender will still pay the bill (even if there is not enough in the tax account), but will charge you interest on the overdraft portion at a rate equal to the face rate of the mortgage.
Instead, a lender will try to determine how much money will be needed to make the first payment, and will assess a holdback as part of the mortgage advance of funds. In the case of the above sample, let’s say the first tax payment would have been $900.00. That would have left the lender $300.00 short when he paid the taxes. As such, he probably would have asked for a $350.00 tax hold back from the advance of funds.
Please be aware that many municipalities charge 1 ¼% per month (15% p.a.) on tax arrears. So you can see it’s important for municipal taxes to be paid on time.
Source: 10 Steps to Becoming a Successful Mortgage Agent
Rates For
Fri, Jul 30, 2010
6:05 am
| 1 Year (Closed) | |
| CIR: 2.70 | Bank: 5.65 |
| 1 Year (Convertible) | |
| CIR: 2.70 | Bank: 5.65 |
| 1 Year (Open) | |
| CIR: 2.70 | Bank: 5.65 |
| 2 Years | |
| CIR: 3.45 | Bank: 3.65 |
| 3 Years | |
| CIR: 3.5 | Bank: 4.1 |
| 4 Years | |
| CIR: 3.89 | Bank: 5.24 |
| 5 Years | |
| CIR: 4.19 | Bank: 5.80 |
| 7 Years | |
| CIR: 5.15 | Bank: 6.0 |
| 10 Years | |
| CIR: 5.49 | Bank: 6.19 |
