Refi hit with title insurance 'junk fee'
Is borrower required to pay?
June 29, 2009
By Benny Kass
Inman News®
DEAR BENNY: We are in the final steps of completing a refinance of our barely year-old $410,000 mortgage. We were pleased with the interest-rate drop, and our local bank was generous in dropping many of the so-called "junk fees" associated with a refinance. However, we are being charged $1,007 for title insurance. When I asked our banker about this, the response was basically, "Well, yes, it is a rip-off but there is nothing we can do about it."
My question for you is what do we get for this $1,007? And if we refinance again in a year (you never know), I assume we will have to pay this again? --Shelley
DEAR SHELLEY: This is a question everyone always asks, whether they are buying a house or refinancing an existing loan. Why do we need title insurance? The simple reason: The lender always insists on it. If your banker believes it is a "rip-off," ask him if he is willing to waive this requirement. I doubt that he will.
Title insurance protects the lender (and you if you have an owner's policy) against matters that do not appear on the land records. For example, there may have been a forged deed years ago and now there is a claim about that. There may be unpaid tax liens that could cause you grief without the title insurance policy.
But your position is: "Hey, we own the property and got a title policy when we bought it. Why does the lender need a new one? I asked Jack Guttentag, the Mortgage Professor, this question, and here's his response: "You don't need a new owner's policy, but the lender will require you to purchase a new lender policy. Even if you refinance with the same lender, the existing lender's policy terminates when you pay off the mortgage. Furthermore, the lender is concerned about title issues that may have arisen since you purchased the property. A new title search will uncover any such issues, and you will have to pay it off as a condition for the refinance."
One suggestion: Since you only recently obtained a title policy, you should be entitled to a discount -- called a "reissue rate." Don't forget to ask for it.
DEAR BENNY: I used the equity in my primary residence to take out a home equity line of credit (HELOC). Two years ago, I used the HELOC to buy a condo as a second home. I am about to sell my primary residence and make a nearly $150,000 profit. I do NOT want to pay off the HELOC right now, as the condo is worth just $50,000 and I paid $150,000 for it.
Must I pay off the HELOC when I sell my primary house? I am a nervous wreck thinking that all the profit I just made is going to have to go to pay off that condo, which is worth less than half of what I paid for it. Since the HELOC is a 10-year line of credit, can I continue to pay monthly on this? --Stacey
DEAR STACEY: Sorry, but you will have to pay off the HELOC when you sell your primary residence. A HELOC is a "home equity line of credit," which is recorded as a mortgage (deed of trust) among the land records where your house is located. If you have a first mortgage, the HELOC is a second trust.
When someone buys your house, they want title to be free and clear of all liens, encumbrances and mortgages. The HELOC lender will not release its lien on the land records unless that loan is paid off in full.
The HELOC lender made this money available to you based solely on the equity in your house. If you were to default by not making payments, the lender would be able to foreclose on the property.
But once the HELOC is released from land records, that lender has no more security. If the condo unit had any real equity, you might be able to get a new HELOC using the condo as collateral. But unfortunately, it does not.
If your credit is good and you have other assets, a lender might be willing to give you an unsecured line of credit, but that's very difficult to get in today's economy.
DEAR BENNY: We currently own several investment properties, along with our home. When we are ready to retire, we would like to be able to liquidate all of the properties in the same year, and in turn purchase a large bed-and-breakfast property.
Will we be able to defer the capital gains on all of the properties that we liquidate if we turn around in the same year and purchase one larger, more expensive property? --Kim
DEAR KIM: Yes, it is legally possible, but logistically improbable.
If you own investment property, in order to defer (not avoid) capital gains tax there is a legal procedure known as a 1031 exchange (commonly called a "Starker exchange"). Under section 1031 of the Internal Revenue Service Code, if you carefully follow the rules, you can obtain a replacement property (or properties) and defer the capital gains tax. Oversimplified, the tax basis of the old property (called the relinquished property) becomes the basis of the replacement property.
The rules are carved in legislative stone and cannot be waived or bent. When you sell a relinquished property, within 45 days from that sale you must identify the replacement property (or properties). And you must take title to the replacement property(s) within 180 days from the date of sale.
In your situation, if it is possible to sell all of your investment properties and purchase the bed-and-breakfast within 180 days from the date of the first sale, you can accomplish a successful 1031 exchange. But as I have indicated, this is logistically difficult.
This is very general information; talk with an experienced real estate and tax attorney who has experience with such exchanges for specifics.
DEAR BENNY: My tenant who just moved into my townhouse three weeks ago has made a couple of requests that I find rather nitpicky. Can you please respond and give me your opinion on the following requests: (1) He found some spiders in the bedrooms and hallway and is now asking that I call an exterminator to remove them, and (2) a few light bulbs are starting to go out and he'd like me to replace them.
I'd appreciate it if you could respond and let me know whose responsibility it is to handle these matters. --Amy
DEAR AMY: Good luck. I hope that is all your new tenant ever asks from you. Any discussion about a landlord-tenant relationship has to start from the lease document itself. I assume (indeed hope) that you have a signed lease in your possession).
Is there anything in your lease that directly -- or even indirectly -- addresses these two issues? More importantly, does the lease state that the tenant has inspected the property and accepts it in it "as is" condition? If so, then you really don't have to do anything.
You are, unfortunately, on the horns of a dilemma. If you agree to take care of either or both of these matters, you will have set a precedent, so that absolutely everything that goes wrong in the house will be called to your attention.
Here's my suggestion: Tell the tenant that these matters are his responsibility. Clearly, changing light bulbs is not the landlord's responsibility. As for the spiders, unless they are one of the dangerous kinds, that is also not your obligation.
I would explain to the tenant that you will periodically exterminate (perhaps once every six months -- unless your lease states otherwise) but that you do not plan to address either of his concerns. Be friendly but firm; just make the tenant understand that he has certain obligations to maintain the house, and unless there are major problems, such as the washer/dryer does not work through no fault of the tenant, it is his obligation to make any such corrections.
DEAR BENNY: My wife died in 2002. We owned our house together. When I sell the house how will the profits be taxed on the federal level? I believe I read somewhere that half of the value of the house will be stepped up as of the date of death. How does this work. How would I go about ascertaining its value in 2002? --Clinton
DEAR CLINTON: Since you are not in a community property state, I will respond. I will leave those who live in such states as California to discuss this matter with their own attorneys.
You originally owned the house jointly, probably as tenants by the entirety. On your wife's death, you became the sole owner of the property by operation of law.
But for income tax purposes, you have to determine what the basis is for each of you. Let's say you bought the house many years ago for $100,000. That means that you and your wife's basis for tax purposes was $50,000 each. Let's further assume that you made no improvements to the property. On the date of your wife's death, the property was worth $400,000.
Your basis now is $300,000. How do I get this? We take your basis, which remains at $100,000, and add half of the value of the property on the date of death -- namely $200,000.
When you sell the property, if you have owned and lived in the house for two out of the five years before sale, you can exclude up to $250,000 worth of any gain.
How do you determine the value back in 2002? Perhaps you and your wife refinanced the property just before she died. There will be an appraisal in the file that was required by your lender. Otherwise, go to the county tax records and find out what they were assessing the property for back in 2002. The IRS will accept that valuation.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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