DEAR BOB: I am new to real estate and am confused by the term “escrow.” I’ve heard it means closing settlement of a property sale, and also that it refers to payment of property taxes and insurance. Which is correct? – Raymond R.
DEAR RAYMOND: Great question. Webster’s Dictionary isn’t very helpful. Among definitions it says escrow means, “in the care of a third party until certain conditions are fulfilled, as a bond, deed, etc.”
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Both escrow purposes you specify are correct. I prefer my explanation I give to my real estate law students: an escrow holder is supposed to be a neutral stakeholder.
In real estate, there are two primary purposes for an escrow holder. One is the third party who holds the property buyer’s money and the seller’s deed. The escrow holder then gives the seller’s deed to the buyer in return for the buyer’s cash.
Of course the escrow holder does much more, such as making certain the title is insurable, recording the deed, and paying various closing expenses such as the realty agent’s sales commission, appraiser’s fee, transfer fees, the seller’s mortgage balance, and other tasks. In many states, a settlement attorney, bank or title company performs the duties of an escrow holder.
The second purpose of an escrow is completely different. It refers to the mortgage lender’s escrow account held for the borrower’s monthly property tax and insurance premium payments. FHA and PMI (private mortgage insurance) home loans require escrow accounts. Millions of other home loan borrowers prefer such escrow accounts, rather than paying property taxes and insurance premiums directly.
Each month, borrowers pay into their mortgage escrow account one-twelfth of the annual property taxes and homeowner’s insurance premium along with their mortgage payment. The lender holds these payments until the property taxes and homeowners’ insurance premium become due and then pays those expenses.
IS HOME LOAN PREPAYMENT PENALTY TAX DEDUCTIBLE?
DEAR BOB: I am thinking about refinancing my home loan. But I have a pre-payment penalty of about $9,000. The mortgage lender says I might be able to deduct this penalty on my income tax return? Is this correct? – Walter S.
DEAR WALTER: Yes. Home mortgage prepayment penalties qualify as tax deductible itemized interest.
But how did you get stuck with a huge $9,000 prepayment penalty? In the future, never accept a home loan with a prepayment penalty unless it has a corresponding benefit such as a low interest rate.
WATCH OUT FOR HOME BUYER TRANSACTION FEES
DEAR BOB: We are making an offer to buy a home and our Realtor wants us to pay a $295 “transaction fee.” He said it is “standard.” But we were never told about this fee before. The agent says it is for licenses, lockbox, and administrative fees. What is the norm for these fees? Our agent is upset that we are trying to get out of paying this fee – Steven B.
DEAR STEVEN: As a home buyer, you should not pay your buyer’s agent any fee. He or she is very well paid by receiving 50 percent of the home’s sales commission.
If I were you, I would fire that buyer’s agent unless that transaction fee is waived. Just refuse to pay. If your agent then fails to present your purchase offer to the home seller, go direct and cut out that greedy buyer’s agent who won’t waive a mere $295 transaction fee.
This is known as a “junk” or “garbage” fee, which is 100 percent pure profit to the agent’s brokerage. If your agent can’t pay his or her own license fee, lockbox charge, and office expenses, that agent is misleading you. Congratulations on protesting. If that agent wants your home sale, the transaction fee will be quickly waived.
NOTIFY YOUR INSURANCE AGENT ABOUT YOUR LIVING TRUST
DEAR BOB: I am thankful you are a proponent of holding titles in living trusts to avoid probate costs and delays. But please let your readers know they should notify their insurance company. Any property title which has been transferred into the owner’s living trust needs to have that living trust listed on the homeowner’s insurance policy. It should also be listed on any umbrella policy for excess liability insurance. Homeowners only need notify their insurance agent of the name of their trust to include coverage at no extra cost. I work in insurance and you wouldn’t believe the number of people who fail to give us this vital information – Erin S.
DEAR ERIN: Thank you for alerting us to the importance of notifying our insurance agents when title to our homes and other real estate assets are held in our living trusts.
HOW EMPLOYMENT LOCATION AFFECTS HOME SALE TAX BREAK
DEAR BOB: I heard that I can get out of paying capital gains tax on the sale of my primary residence if I have lived in it less than 24 months but if I am moving more than 50 miles away, since I am changing my employment location. Is this true? – Ashlee H.
DEAR ASHLEE: You are very close, but not 100 percent correct. To qualify for a partial Internal Revenue Code 121 $250,000 (up to $500,000 for a married couple) principal residence sale tax exemption, one of the acceptable reasons is a change of employment location. To qualify, your job site change must qualify for the moving expense tax deduction.
That means your new job location must be at least 50 miles further away from your old home than was your old job site. It doesn’t matter if you change employers, or become self-employed. However, there is a minimum work time required in the vicinity of the relocation.
Suppose your old job was 5 miles from your old home. For you to qualify for the moving cost tax deduction, and the partial IRC 121 principal residence sale tax exemption, in this example your new job site must be at least 55 miles (5 miles plus 50 miles) from your old home. The distance from your new residence to the new job location is irrelevant. For full details, please consult your tax adviser.
IS IT LEGAL FOR HOME BUILDER TO OFFER MORTGAGE INCENTIVE?
DEAR BOB: We are in the process of buying a brand-new home. The builder offered us an incentive of about $20,000 if we go with their in-house mortgage company. Is this legal? – Caesar D.
DEAR CAESAR: Yes. It is legal if fully disclosed the builder owns or is involved with the mortgage company. But you don’t have to obtain your mortgage from that firm. Shop around to compare the builder’s mortgage terms with what you can obtain elsewhere.
IS HOME INSPECTOR LIABLE FOR UNDISCLOSED BATHROOM LEAK?
DEAR BOB: I just bought a house and found out it has a major leak. I cannot use the master bath because it leaks and comes out on my downstairs den floor through the wall. My professional home inspector says he is not liable because it was a hidden problem. What can I do to get help repairing this problem? – Peggy C.
DEAR PEGGY: If there was visible evidence of the bathroom leak when your professional home inspector checked the house, and he missed it, he is liable for your damages (probably the repair costs).
However, if there was no evidence of the leak, you can’t expect your professional inspector to discover it.
If you can prove the home seller and/or realty agent knew of the leak, but failed to disclose it before your purchase, then the seller and/or agent may be liable to you for the misrepresentation.
Even if the house was sold “as is,” which means the seller won’t pay for any repairs, the seller still must disclose known defects. For further details, please consult a local real estate attorney.
CAN OWNER OF INVESTMENT RENTAL PROPERTY GET HOME EQUITY CREDIT LINE?
DEAR BOB: Recently you explained the benefits of home equity credit lines. Can such a loan be obtained on a non-owner occupied rental property? – Mark McK.
DEAR MARK: Each home equity credit line lender, mostly banks, set the rules for their loans. I am aware of several major nationwide banks that approve home equity credit lines on one to four-unit rental properties. I suggest you “dial for dollars” among local banks to learn if such credit lines are available in your area.
The new Robert Bruss special report, “How to Avoid Buying or Selling a Bad ‘Lemon’ House,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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