By Fidelity National Title Co
March 28, 2012
Real Property Tax Prorations
Every state bases its property tax calendar year differently. In California, for example, the calendar year is from July 1 to June 30th. Some states collect property taxes in advance, some collect in arrears, and some collections depend on the time of year. Taxes are most often paid in two installments.
The first thing is to figure out if the period during which you are closing involves prepaid taxes. If the taxes are prepaid, and you are the seller, you will receive a credit. If the taxes are prepaid, and you are the buyer, you will be charged. The opposite is true if taxes are not yet due and payable: sellers will receive a debit proration and buyers a credit proration. In some situations, even if the taxes are not yet due and payable, if your closing date is near the date taxes will be due, your closer will pay the taxes from the seller’s proceeds, credit the unused portion to the seller and charge the buyer accordingly.
Some calculating buyers will ask for no tax prorations in the purchase contract if it is apparent that the buyer will be expected to reimburse the seller for a portion of prepaid taxes. If you are a seller in this situation, and you do not understand the significance of “no prorations,” you will pay taxes for a period that you did not occupy the property.
Mortgage Interest Prorations
Unlike rent, which is paid in advance, mortgage interest is paid in arrears. When you pay a mortgage payment on Jan. 1, for example, it pays the interest for December. On a new mortgage loan, lenders want to collect interest up to 30 days before the first mortgage payment is due. This means if you close on, Nov. 15, your first mortgage payment will be due Jan. 1. The Jan. 1 mortgage payment will pay interest for December. As the borrower you will be charged 15 days of interest on your closing statement, from Nov. 15 to Dec. 1. To figure out your interest proration in this scenario, here is the formula:
- Loan Amount x Interest Rate = Annual Interest
- Annual Interest divided by 12 Months = Monthly Interest
- Monthly Interest divided by 30 Days = Daily Interest
- Daily Interest x 15 Days (to pay the interest to Dec. 1) = Interest Debit Proration
The same principal applies to sellers who must pay interest in conjunction with a loan payoff, pursuant to the lender’s beneficiary demand.