Less Costly Refinances
Real estate ownership has costs associated with it. When I close real estate transactions, one of my jobs is to explain to the borrower how the debits and credits associated with the closing break down and ultimately determine whether or not money needs to be brought to the closing. Two of the particular fees that are itemized on page two of the HUD-1 Settlement Statement are title insurance and Intangibles taxes.
When someone initially purchases real estate, and they borrow money, the lender is charged a fee for a Lender’s title insurance policy. The owner has the option to purchase an Owner’s title insurance policy. Whether the borrower decides to purchase an Owner’s title insurance policy or not, the lender will not loan money without being issued a title insurance policy protecting the lender’s secured interest in the property. Rather than paying the fee for the policy, the lender passes the cost on to the borrower by including the fee in the borrower’s settlement charges.
As for refinancing the property initially purchased, a new loan represents a new risk of loss for the refinancing lender because of a potentially different priority position or level in the property. Consequently, there are new legal risks of loss for the lender, so the lender will require a new Lender’s title insurance policy.
The title insurance premium charged for the Lender’s title insurance policy on the refinance should be less than the premium charged at the purchase because of “Reissue” rates. Title insurers charge Reissue rates when an interest being insured has been previously insured by a “reputable” title insurance company within the last ten (10) years. The reissue rate charged by Craig Long, LLC, who underwrites title insurance for Stewart Title and Guaranty Company and Chicago Title, is sixty (60%) percent of the previous market, or published, rate charged. However, if the lender and borrower were given a discount, the Reissue rate does not apply.
Another fee charged and itemized on page two of the HUD-1 Settlement Statement is Intangibles taxes. When a purchase of real property occurs and the buyer borrows money to make the acquisition, the seller conveys to the buyer an interest in the property and the buyer in turn conveys to the lender an interest in the property. These interests obtained by the buyer and lender are “intangible” personal property rights the State of Georgia has decided to tax. The State of Georgia taxes a lender’s “intangible” property at closing and the lender makes the borrower pay the tax for the lender.
In a refinance context, the Intangibles taxes can be mitigated and possibly avoided. The regulations of the Georgia Department of Revenue provide that Intangibles taxes are not assessed against the part of the new loan that represents a refinancing of the current unpaid principal. Any amount over and above the current unpaid principal represents “new” money being loaned and is charged the normal Intangibles taxes of $1.50 per $500.00 of debt. For example, if I borrowed $100,000.00 last year and now have an unpaid balance of $95,000.00 and call you to borrow $110,000.00; I will pay Intangibles taxes on the difference of $15,000.00, or $45.00, rather than on the $110,000.00, or $330.00, if I borrow money from the same lender.
These two fees charged to borrowers on the HUD-1 Settlement Statement can be significant. You now know how to help mitigate these fees for your clients and hopefully close more transactions by reducing the costs. Give us a call at 678-679-0680 if we can help you succeed this year.
