A law lowering closing costs in Maryland took effect in part July 1, but homebuyers may have to wait months -- or even years -- for the intended benefits.
The first overhaul of Maryland's property tax system in two decades, signed into law in May, is expected to save many homebuyers thousands of dollars at settlement time and bring costs in line with those of neighboring states. The real estate industry views the reduction in upfront costs as a first step toward energizing a stalled housing market and boosting economic development.
But government officials and real estate professionals are just starting to work though the intricacies of the law, and say it remains unclear how it will work in practice.
One provision will allow any Maryland homebuyer or homeowner to elect to pay property taxes semiannually. Now, closing costs are higher than in many states because Maryland requires a year's property taxes in advance.
But the option of paying half a year's taxes up front will not be available in all Maryland counties until the tax year that starts July 1, 1996. Now, only Baltimore City and Harford and Frederick counties offer semiannual plans. Under the new law, localities may levy a service charge and a fee for lost interest on anyone who chooses to pay semiannually.
To pay semiannually, rather than annually, homebuyers must elect to do so prior to the start of a tax year or wait another year to make the switch, said Bill Castelli, government affairs director for the Maryland Association of Realtors.
That is because a seller would be owed the portion of the property tax he had prepaid but hadn't incurred before selling. Under the current system, a portion of the buyer's tax payment reimburses the seller for his prepaid tax and the rest is held in escrow by the lender until the tax is due.
Representatives of local government tax billing and collections offices have been meeting with a Maryland Association of Counties and Maryland Municipal League work group to determine how to ease into the semiannual billing cycle.
For the start-up year, members are considering sending all property owners applications before next July for making the switch to semiannual payments. Those who choose that method would then get a second tax bill in January, said Sharon Greisz, chairwoman of the group and chief of Howard County's Bureau of Revenue. The unused portion of a taxpayer's escrow account should be returned as a refund from the mortgage company.
For potential homebuyers, the actual savings at closing will depend in large part on the time of year they settle -- and on whether the seller is on a semiannual or annual payment schedule.
For instance, someone buying in August would need to reimburse a seller for the 11 months he had prepaid in July -- unless the seller had switched to the semiannual plan and only prepaid six months. Someone buying in December, however, would need only to reimburse a seller for six months, then could start saving for the July payment in an escrow account.
Someone buying in June would reimburse the seller for that month, then could elect to pay for the next six months rather than the next 12.
Some homeowners might opt for the semiannual plan as a way to market their homes more easily when it comes time to sell, said Pat Roddy, Baltimore County's assistant county attorney.
"The question is how many people will do this," he said. "It will be more expensive."
Even after individual counties and towns revamp their tax billing systems, buyers must still meet their mortgage lenders' escrow requirements, which could exceed the state's requirement. Lenders set up the accounts, maintained through monthly mortgage payments, to ensure the payment of annual property taxes, insurance premiums and other expenses. Lenders are permitted to retain a cushion of up to two months' worth of payments in an account.
Besides offering a semiannual tax payment plan, the closing-cost law addresses state and local transfer and recordation taxes. In Maryland, buyers and sellers have customarily split those costs, although they're negotiable. In fact, most printed sales contracts stipulate that buyer and seller share the costs.
Starting Sept. 1, first-time buyers will be exempted from their half of the state's half-percent transfer tax on the purchase price. Sellers must continue paying their half, or a quarter-percent of the purchase price.
The law also presumes that sellers will pay local transfer taxes for first-time buyers, unless otherwise negotiated. Local transfer taxes in some jurisdictions are higher than the state transfer tax.