The new semiannual tax payment plan -- the key part of the closing cost package passed by the legislature last week -- will sharply lower settlements costs for first-time buyers, as well as provide a windfall of perhaps $1,000 or more for all homeowners.
First-time buyers may not feel the full effect of the law until the end of the year, and homeowners may not receive any windfall for 1 1/2 years.
In addition, some first-timers may not benefit as much as others -- merely because of the time of year they buy a house.
The law will allow all homeowners to pay property taxes in two installments -- six months' worth at the start of the fiscal year, July 1, and six months' worth by Jan. 1. Property owners now pay the full year's taxes at the start of the year.
The privilege will have a price: Local jurisdictions will be allowed to charge a fee, based on a percentage of the second installment. Baltimore City, which already has such a system, charges about 3 percent of the second installment, equivalent to borrowing the six months of taxes at an annual interest rate of 6 percent. (According to several tax preparers, the fee will not be deductible.)
With current rules, all buyers must come up with a year's worth of taxes at closing. (Actually, part of the money is set aside, in escrow, to pay for taxes due next July 1 for the next fiscal year, and part is used to reimburse the seller, who has already paid the taxes on the house for the current fiscal year through June 30. The amount of each of these two parts vary, according to the time of year, but together they equal a full year of taxes.)
Move-up buyers typically don't have a problem with the upfront taxes; they use the money they've been paying into their escrow account, as well as the reimbursement from the buyer of their house.
But first-timers have to come up with the money from scratch.
On a $130,000 home -- the area's median price -- a buyer in Baltimore County has to pay $1,500 for upfront property taxes; in the city, the buyer of a similar house in the city would need about $3,000. The amounts do not include another two months of taxes that lenders typically require as a cushion in the escrow account.
The new law halves the amount needed at settlement: The county buyer would save $750, the city buyer would save $1,500.
"The basic theory is good, and it will reduce settlement costs," says Chip Reichhart, executive vice president of MNC Mortgage Corp.
But Mr. Reichhart notes that there may be at least one hitch. First-timers buying in the summer or fall may not be able to fully benefit.
If the seller had been paying taxes annually, and the transaction occurs at the start of the fiscal year, the seller will want to be reimbursed for a majority of the taxes already paid.
For example, if closing was on Aug. 1, the buyer would owe the seller 11 months' worth of taxes -- for the 11 months left in the fiscal year that have already been paid. The same transaction that settles in the winter or spring would require only 6 months' taxes upfront.
For current homeowners, the benefit of the semiannual tax plan may come as a one-time windfall, equivalent to six months' worth of taxes.
Homeowners pay money each month into an escrow account to pay for the property taxes due in July -- by which time there is 12 months of taxes in the account. If a homeowner signs up for semiannual payments instead, only six months' taxes would be due, and the lender or loan servicer would be required to refund the excess escrow.
The law takes effect July 1. But the first taxes that will be affected are those due July 1, 1996.
First-time buyers may start benefiting fully near the end of the year, while homeowners seeking cash back may not see it until late next year.