Getting Rid of an Impound Account

Q: After we refinanced our home, the loan was sold to another company. We are not happy about the way this company is handling our impound account and would like to pay our own taxes and insurance.

How do we go about doing this? -- J.L .

A: Impound accounts, which collect the taxes and insurance payments of mortgage holders each month for payment once or twice a year, have been the subject of repeated consumer complaints over the years.

At least 16 million of the outstanding mortgages today involve the use of impound accounts. (In some areas, these accounts are also referred to as escrow accounts, although that term should not be confused with the escrow process used during a sales transaction.)

The principal complaint? The lender or loan servicing company has the use of the borrower’s money for the entire year but pays only minimal interest. A close second? The lender or loan servicer requires borrowers to contribute more to the account than is absolutely necessary--or at least more than the borrower thinks absolutely necessary.

(These gripes, of course, do not cover the problems associated with fraudulent or incompetent loan servicers that either abscond with account funds or “forget” to pay tax or insurance bills.)

However, aside from cases of fraud or incompetence, California borrowers probably have little choice but to put up with the arrangement. Why? By state law, a lender on a home mortgage that is 80% or more of the home’s value can require the borrower to maintain an impound account.

Impound accounts are required on Veterans Administration or Federal Housing Administration loans. In addition, lenders will often require impound accounts on homes that will not be occupied by the owner or for borrowers who have spotty mortgage payment records.

The best way to be rid of an impound account is to change the circumstances that put you in one, although this could mean going through hoops and considerable expense.

Perhaps your loan-to-value ratio has fallen below 80% because your home has appreciated. If so, you will need to convince your lender of that fact. This could, however, require you to commission an appraisal of your home, not a trivial expense.

You could consider another refinancing, but the cost involved and today’s rising interest rate environment argue against it. You might also consider simply telling your servicer that you want the account dropped. Although it isn’t likely to work, it couldn’t hurt to try. Besides, it won’t cost you anything.

If you can substantiate poor service or more serious transgressions, you could try taking your complaints to the agency licensing your loan servicer.

If the servicer is a mortgage banker, you can complain to the California Department of Real Estate at (213) 897-3399. If it is a bank, complain to the Federal Deposit Insurance Corp. by calling its consumer hot line at (800) 934-3342.

Taxes on Inherited Real Estate Mortgages

Q: I am to inherit interest in several real estate mortgages and expect to be receiving monthly interest payments until the mortgages are repaid. What type of inheritance taxes can I expect to pay on this income? -- C.A.M .

A: You will not be paying any inheritance taxes on the bequest. But that’s not to say there won’t be a tax bite: You will be responsible at least for ordinary income taxes on whatever interest income you receive in the monthly mortgage repayments.

Here’s what will happen: The estate of the deceased is responsible for paying any inheritance taxes. (It’s possible that none will be required if the estate does not meet the $600,000 level at which taxing begins.)

Once the estate tax issue is settled, there is the matter of the income generated by the interest on these mortgages. That will be your responsibility.

You should declare the interest portion of the monthly payments as ordinary income when you file your tax forms each year.

When the principal on each of these mortgages is repaid--and assuming these mortgages were not a part of installment sales--that payment will be tax-free to you. (If the mortgages were generated by an installment sale before the donor’s death, the government will tax the principal to recover its share of the deferred gain realized by the donor.)

Widower or Divorce May Use Exclusion

Q: During my wife’s previous marriage, she and her then-husband sold their home and took advantage of the $125,000 exclusion. I, however, have never taken advantage of the exclusion. Would I be able to use it if I were no longer married to this woman?

-- A.S.A .

A: If you become either widowed or divorced, you would again be eligible to use the $125,000 exclusion. The law says that if one spouse has used the exclusion, the other may not for as long as the marriage lasts. Once you are on your own, however, you are again free to use it. *

More on $125,000 Exclusion: Because the $125,000 exclusion is often the subject of reader queries, Times on Demand has prepared a booklet containing answers to 20 of the most-asked questions on this tax-saving program. To order, send $5.91, including tax and delivery, to Times on Demand, P.O. Box 60395, Los Angeles, Calif. 90060. Please allow two weeks for delivery. You may also order by calling Times on Demand. Dial 808-8463, press *8630 and select option 3. Order Item No. 2812.