What The Property Tax?
Paying Taxes With a Mortgage
Most homeowners and lenders roll property taxes into borrowers’ monthly mortgage bills. While private lenders who offer conventional loans are usually not required to do that, the FHA requires all of its borrowers to pay taxes along with their monthly mortgage payments.
To determine how much property tax you pay each month, lenders calculate your annual property tax burden and divide that amount by 12. Since their numbers are estimates, some lenders require their borrowers to pay extra money each month in case the property tax payments come up short. If you end up paying more property taxes than you need to, you’ll receive a refund. If you underpay your property taxes, you’ll have to make an additional payment.
When you pay property taxes along with your mortgage payment, your lender deposits your property tax payment into an escrow (or impound) account. When your property taxes are due to the county, your lender uses the funds in that escrow account to pay the taxes on your behalf.
Both you and your lender should receive a notice from your local tax authority. If you don’t, it’s best to contact your lender and your tax authority to make sure your property taxes are being paid on time.
Why Can’t I Just Pay Property Taxes Myself?
Including your property tax payments in your mortgage payments allows your lender to protect himself. If a homeowner is forced into foreclosure, his lender will likely have to pay the remaining property tax amount. That’s why failing to pay property taxes is considered an event of default, allowing your lender to foreclose on your property.
While some homeowners would rather pay property taxes themselves, rolling your tax payment into your mortgage payment allows you to avoid shelling out large amounts of money to tax collectors once or twice a year. Some lenders might even offer to lower your interest rate when you choose to pay your property taxes through an escrow account. Besides, you’ll probably only be able to pay your own property taxes if your loan-to-value ratio is low (i.e. somewhere below 80%).
What Happens When You Pay Off Your Mortgage?
Once your mortgage is paid off, your lender won’t be collecting payments from you anymore. At that point, paying property taxes becomes your responsibility.
Sometimes lenders let their borrowers start paying their taxes directly before their mortgages are paid off. This might happen if you’ve paid down a significant portion of your principal loan balance.
When preparing to purchase a home, you may need to speak with your potential lender about paying property taxes. Most likely, your taxes will be included in your monthly mortgage payments. While this may make your payments larger, it’ll allow you to avoid paying a thousand dollars (or more) in one sitting. And with your lender’s help, you can make sure that your property tax payments are made in full and on time.
