Q. I am trying to buy a house in Maryland and have been disturbed by recent reports that closing costs in Maryland are extremely high. Do you have any suggestions on how I can save some dollars at closing?
*A. Closing costs always hurt -- especially because they have to be paid in cash at the settlement. You should obtain a list of estimated closing costs from the real estate broker or agent, and when you apply for your mortgage loan, the lender also will give you a good-faith disclosure statement (required under federal law) that gives you the range of settlement costs in the area.
The biggest closing costs are the points that you have to pay the lender, the recordation and transfer tax that must be paid when the deed is recorded and, in Maryland, the full year's real estate taxes.
*Lender's points. Generally speaking, lenders today charge between 2 and 3 1/2 points for the borrower to obtain mortgage financing.
As you know, a point is the equivalent of 1 percent of the amount of the loan. This should not be confused with the total purchase price of the property. Thus, if you are buying a house for $120,000 and obtaining a $96,000 loan, each point that you will have to pay is based on the loan amount, and thus each point will cost $960.
In most cases, it makes no difference to the lender whether the borrower or the seller (or a combination thereof) pays the points. So long as the points are collected and paid at settlement, this will satisfy the lender. Points generally are deductible in the year they are paid. However, only the buyer (borrower) can deduct the points as interest deductions. The seller can reduce his or her profit in the house by paying the points, but the tax benefits to the seller are not as great as to the buyer.
*Recordation and transfer tax. In Maryland, the combination of all such taxes is almost 2 percent. Traditionally, the buyer pays these costs, but unfortunately these items are not deductible for tax purposes. If you buy a $120,000 house, and you pay almost $2,400 in transfer taxes, this additional amount is added to the basis of your property, but not deductible in the year it is paid.
*Annual real estate taxes. Unlike many jurisdictions in this area, Maryland requires that real estate taxes be paid one year in advance. The tax year is July 1 through June 30, and the entire bill is payable in September. This is a very large item that must be paid, and buyers end up paying just about a full year's taxes in advance regardless of when they purchased the house. For example, if you buy your house in November, you will have to reimburse the seller for the balance of the calendar year, because the entire bill was paid in advance. If, for example, you purchase the property in May, while you will have to reimburse the seller only for the real estate taxes through June 30, your mortgage lender invariably will want you to put enough taxes in escrow so that you will be able to pay next year's tax when it comes due in September.
Now that we have highlighted three of the major closing costs, let us see if there are some creative ways to save you some money.
As we have discussed, it is more beneficial to the buyer to pay the points, and it is more beneficial to the seller to pay the recordation and transfer tax. Thus, why not ask the seller to pay all of the recordation and transfer tax? This could be a savings of almost 2 percent. Unfortunately, the standard-form Maryland contract used by the real estate industry calls for these taxes to be paid by the buyer. It is interesting to note that the standard-form District of Columbia contract leaves a blank as to who will pay those taxes.
There is no legal requirement for the buyer to pay these taxes. As this column has suggested on numerous occasions, absolutely everything in the real estate field is negotiable. Accordingly, I suggest that you ask the seller to pay all -- or at least half -- of this recordation and transfer tax.
As a tradeoff, you may be willing to agree to pay all of the points, because you usually can get the tax deductions for paying those items. As a further tradeoff, you might want to consider raising the price of your offer slightly, to compensate the seller for this additional payment. Under this arrangement, presumbly you can finance a little more of the purchase price, and at least you will not have to come up with all of the money out of pocket on the date of settlement.
As for the Maryland requirement of paying the entire real estate annual tax in advance, I only can suggest that the consumer/homeowners write their state legislators to see if this procedure can be changed. Many states have survived by getting their real estate taxes twice a year, rather than one year in advance.