If you're a first-time homebuyer, you may have questions about how your property taxes and homeowners insurance will impact your mortgage loan. A lack of clarity from mortgage lenders often leads to confusion over how much you'll really be paying for your mortgage, when taxes are due, and how to appeal an unfair property tax assessment.
Ownwell provides advice on tax bill management to take the guesswork out of monthly mortgage payments. Find answers to questions such as whether property taxes are included in your mortgage payment and steps to fighting property tax overassessment to lower your monthly payment.
Property Taxes and Mortgage Payments
Although property taxes are not technically part of a mortgage loan, they're usually bundled into your monthly house payment via an escrow account. Mortgage servicers determine the designated portion of your monthly house payment to be deposited into your escrow account.
The amount set aside for escrow is an estimate of the property taxes and insurance you will need to cover for the year, divided into 12 monthly installments and added to the cost of the mortgage loan.
The Role of Escrow Accounts
The main difference between having an escrow account and making non-escrow payments for property taxes and homeowners insurance is who is responsible for collecting and making the payments.
Mortgage companies use escrow accounts, also called impound accounts, to collect funds to pay your annual property tax bill and homeowners insurance. Lenders make these payments on your behalf to guarantee property taxes are paid on time and to prevent potential fines or liens from being assessed on the property.
Without an escrow account, the homeowner is responsible for budgeting and making property tax and insurance payments directly.
Advantages of Including Taxes in Mortgage Payments
Homeowners enjoy certain benefits from including property taxes in their mortgage payments:
Convenience: Escrow accounts shift responsibility for tracking and collecting funds to cover property-related expenses from the homeowner to the loan lender.
Spreads out expenses: Paying expenses out of escrow prevents homeowners from having to make one large payment at the end of the year.
Lender protection: It safeguards mortgage lenders' interests by ensuring the timely payment of taxes and insurance.
Drawbacks of Escrow for Property Taxes
Including property taxes in your mortgage payment and using an escrow account for payment can have disadvantages:
Higher mortgage payments: Lending institutions typically charge a fee for administering escrow accounts, which increases the overall cost of your mortgage.
Fluctuating payments: Escrow payments are simply an estimate of taxes and insurance premiums, which fluctuate based on property tax trends, sometimes causing unexpected changes to mortgage payments.
Loss of control: Homeowners cede control of when and how their escrow funds are used to the mortgage lender.
Non-investible accounts: Escrow accounts are non-investible. Meaning, the money in them can't be invested and grown.
Impact of Property Tax Fluctuations on Mortgage Payments
Property tax rates are figured as a percentage of a home's assessed value. As the value increases, property taxes also rise, which can result in higher monthly payments.
One way to combat rising mortgage payments is to appeal overly assessed property taxes. Ownwell can file a property tax appeal on your behalf to lower both your real estate tax obligation and your monthly mortgage payment.
You may also be eligible to apply for property tax exemptions, which reduce the assessed value of your home to save you money.
Pros and Cons of Including Property Taxes in a Mortgage
Homeowners should weigh the pros and cons of bundling property taxes and mortgage payments based on their personal finances, comfort level, and convenience.
Budgeting Simplification
Using an escrow account has the potential to simplify your budget because the lender collects the money in 12 equal payments throughout the year. Saving for property-related expenses over a longer period helps with financial planning and means you avoid coming up short or making a late payment at the end of the year.
Potential Escrow Inaccuracies
Lenders prefer the escrow system because it protects their interests from a homeowner failing to pay taxes or insurance on time, risking the lender's investment. However, sometimes mortgage companies miscalculate or underestimate the amount required to pay property taxes and insurance premiums.
If a lender underfunds, resulting in a shortage in your escrow account, the homeowner is required to make up the difference at the end of the year. Penalties or legal issues resulting from errors or late payments are also the homeowner's responsibility.
Financial Control and Flexibility
Many first-time homebuyers budget anticipated house payments based on what they borrowed from the lender. Tacked-on escrow estimates cause the monthly payment amount to increase. Homeowners who haven't planned for these expenses may experience financial strain.
Money in an escrow account also doesn't earn interest, so homeowners miss potential interest gains they may have received if the money were in a savings account instead.
Mortgage Payment Calculation
You can calculate your anticipated mortgage payment with property taxes. First, determine the principal and interest payment amounts on your loan. Add your estimated monthly property taxes and divide by 12.
Start with the principal and interest owed each month.
For example, A $300,000 30-year conventional loan with 6% interest comes to approximately
$1,798.65 in monthly payments.
Find the assessed value of your home and local tax rate. Multiply the home's value by the tax rate, which is the amount you will pay in property taxes annually.
One home valued at $300,000 with a 2% property tax rate owes $6,000 in taxes each year.
Divide the expense of the property taxes by 12. ($6,000/12 = $500/month).
Add the cost of principal and interest on your loan to the monthly expense of property tax, the sum of which is your monthly mortgage payment ($1,798.65 + $500 = $2,298.65). You can also include monthly insurance premiums in your calculations to figure your payments with that expense bundled in as well.
Managing Property Taxes Independently
Not all mortgages require property taxes to be included within the mortgage payment. It's possible to pay them separately if you meet the mortgage lender's requirements for an escrow waiver. This usually involves a down payment of 20% or more on the initial loan.
How To Pay Property Taxes Directly
The local property tax office will bill you directly, either once or twice a year, via mail. In most jurisdictions, you can pay your property tax bill online or in person at your local tax office.
Timing and Requirements for Independent Payments
When and how you pay property taxes independently vary widely depending on the state and local jurisdictions in which you reside. Some states allow residents to pay in several installments or a single lump sum payment.
Deadlines may be at the beginning or end of the year, depending on your state and county. It's essential to verify all deadlines and requirements for tax payments in your area.
Strategies for Efficiently Managing Property Tax Payments
Avoid coming up short or late tax payments by knowing how much your property taxes cost, budgeting for them, and setting aside money each month to pay them before the deadline. Consider setting up a separate account for property tax savings, earmarked for that purpose.
You can get help from the professional tax consultants at Ownwell to guarantee that your property tax bill is accurate.
What Happens If Property Taxes Are Not Paid?
Paying property taxes isn't optional. Unpaid taxes can result in higher tax bills and even the loss of the property.
If you're struggling with tax bills that are too high, consider seeking assistance to reduce them. You may also consider exploring options that allow you to pay off your property taxes in smaller increments.
Consequences of Non-Payment
Failing to pay your property taxes by the deadline leads to penalties and interest added to the cost of your property tax bill. For example, Texas begins assessing interest and penalties on late property tax accounts on February 1 each year with a 6% penalty and 1% interest. Any additional 1% interest is added each month until July, when the penalty increases to 12%.
A tax lien can be placed on the property, making it difficult to sell or refinance your loan in the future. If you miss additional deadlines, the taxing entity has the right to sell your property to recover the cost of the taxes.
How To Avoid Penalties and Interest
Pay your taxes by the deadline set in your area to avoid accruing penalties and interest.
Resolving Delinquent Property Tax Issues
Your state may offer a redemption period, which allows homeowners a last opportunity to pay off any outstanding balance, including taxes, penalties, interests, and costs, to reclaim the property. Redemption periods are different from state to state but generally span from six months to three years. Ownwell offers payment and delinquency monitoring to help you through this process.
Paying Property Taxes After the Mortgage Is Paid Off
Once a mortgage is paid off, the lender drops your escrow account as well, and you are responsible for paying your property taxes directly to the taxing entity in your area. You may also qualify to drop an escrow account when the loan-to-value ratio of your loan is 80% or less.
Transitioning from Escrow to Direct Payments
Review the terms of your mortgage to determine when the escrow requirement is removed from your loan. Contact the lender if necessary. Inform your homeowners insurance provider and the local taxing authority that you are transitioning to direct payments.
Maintaining Control Over Tax Payments
Plan for property tax payments over time rather than managing them right before your state's tax deadline.
Importance of Staying Informed About Local Tax Requirements
Continue to be aware of changing property tax values, which impact the annual cost of your property tax bill.
Manage Your Tax Bills Effectively With Ownwell
Homeowners aren't the only ones with property taxes. Ownwell offers tax bill management services for commercial real estate, property managers, and asset managers, enabling them to manage their commercial real estate needs effectively. Let Ownwell turn your property taxes into profit by appealing and managing them for you.
