Property taxes

December 18, 2008
Matt Isleib

 

Depending on where you live your taxes are either semi annually or quarterly. When you are purchasing or refinancing you have two options. Have the taxes included in your mortgage payment in which case you would need to start what is called an escrow account or pay them yourself. Side note on this if you are putting down less than 10% on a purchase or have less than 10% equity in your home when you refinance you must with most lenders escrow.

 

If you choose not to escrow and pay your taxes yourself you will get a bill from your town tax collector at the time they are due.

 

If you choose to have your taxes included in your mortgage payment you will need to start an escrow account. Let’s use for example the home that you are purchasing has a yearly tax bill of 6,000 annually. And the town collects on a semi annual basis. At the closing you will need to bring money to deposit with the lender in an escrow account on your behalf. Typically 6 or 7 months of taxes up front. So you would need 3,000-3,500 to have escrowed.

 

How the escrow account works is the lender holds that money in what is referred to as an escrow account on your behalf. It typically bears some interest although do not get too excited about the rate of return, it is next to nothing but at least something. That money will sit there until your tax bill is due. When it is due the lender will disperse the money needed to pay your property tax bill.

 

So once you have established your escrow account you will pay the lender a portion of your taxes that will be due each month with your mortgage payment. For example 6,000 for annual taxes is 500 a month.

 

The reason this is done and offered is most people want the flexibility of paying their tax bill spread out over a year rather than having a mortgage payment and a tax installment due the same month twice a year. January and July if your taxes are semi annual. This allows the borrower to pay less and have the lender hold the money in escrow and disperse the funds to the town or city when the tax bill is due. And you the borrower need only worry about making the monthly payment.

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