Tuesday, February 5, 2008

Florida’s tax burden on refinancing prevents homeowners from taking advantage of lower rates.

With the recent cuts in mortgage rates, many homeowners will be looking into refinancing their mortgages to lower their interest expenses. Once they calculate the total cost, however, a lot of Floridians will find that refinancing is no longer attractive so they will be forced to stay with their existing loans at higher rates.

Florida has a very expensive tax on refinancings. Under the innocuous labels of “Documentary Stamps” and “Intangible taxes” the State has a very lucrative practice that has stymied relief for homeowners. For each new note, the State collects $.35 per $100 or fraction of the mortgage amount plus $2 per thousand financed. For the typical mortgage of, say, $200,000, these taxes amount to $1,100, which are usually added to the mortgage. So, when the dust settles, the mortgagor actually now owes more than before albeit at the reduced interest rate, losing a large portion of the expected savings.

What does the State provide in return? Well, it does keep track of what it collects, which goes to finance things it wants to buy... never mind that the action of a refinancing places no additional demands on government services whatsoever... What is the connection between refinancing a home and the need to generously compensate the State for this mere action? Please someone let me know...

Title Insurance is the other expense that creeps up on a refinancing. While Title insurance in most states is a negotiated amount, where the proven forces of free market competition ensure the best deals to consumers, in Florida, it is “regulated” to ensure no one, except the insurer, gets a good deal.

So, if a homeowner wants to refinance his home because the interest rates went down a percentage point, in most cases it is not economically feasible dues to the closing costs which include the new title insurance, intangible taxes and stamps, the sum of which in most cases exceed the savings of the lower rate. Most egregious since the homeowner already paid for these things once when he first bought his home!.

How can Florida help?. Since refinancings provide sort of a “windfall revenue stream” to the State, why not reduce the intangible taxes and Doc stamps on refinancings by, say, 80%, or better yet, eliminate them. It would not in any way place new demands on government services while it certainly provide a boost to our state’s real estate recovery. Similarly, overhaul the archaic and inflexible Title Insurance structure, make it market-driven and regulate it just enough to ensure it preserves fairness to protect us all, not just the Insurers.

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