Property Taxes - Should you pay for it or your lender?
February 21, 2020 | Posted by: Sherry Corbitt
Property tax – everyone must pay them (unless you rent, etc.), but who should pay them? You or your lender?
Property taxes are typically paid to your municipality on a quarterly, semi-annual, or annual basis. The total taxes for the year are calculated based on the property’s assessment multiplied by the municipality’s current tax rate for the property tax. Therefore, the exact amount owed on the property will often fluctuate.
Why would a lender pay for the property taxes? It’s all about reducing risk. If you find yourself unable to make your property tax payments, the municipality can place a lien on your property. If you were to then file for bankruptcy, this lien supersedes the debt payments owed to the lender. Lenders don’t want this because then they lose money.
When your lender pays, it is a combined property tax and mortgage payment. They estimate the total annual property tax payment and then divide it by the number of mortgage payments you make each year and hold that money into a property tax account until the property taxes are due. This may sound like a stress-free way to pay your property taxes, letting someone else handle it, but what you may not know is that lenders will often make your mortgage payment quite a bit higher because they will add in more than the estimated property tax amount to cover any possible fluctuations in annual tax increases.
When the lender collects the excess cash from you, they will often roll this surplus over to the following year as a safeguard. Eventually, the additional funds may be paid back to you, but it could take a while, especially if you need those extra funds now.
What happens if the lender hasn’t judged the payment schedule correctly or their estimate was wrong, and there are not enough costs for the year? Suddenly, you will find yourself having to pay the difference (money that you may not have). Not only that, but during the first year of your mortgage, they may even want 18 months of property taxes paid over 12 months. Also, if your mortgage funds are during the period when annual taxes are due, the lender may ask to collect up to 24 months worth over 12 months.
If any issue arises on the lender’s side with your property tax payments, you will have hoops to go through to settle it.
In most cases, if you are comfortable budgeting, it is better if you sign up directly with your municipality to pay the property taxes. You can even set up pre-authorized payments, either monthly or in installments instead of in one lump sum. Know your options before you make a decision.
If you have any questions about property taxes, please reach out to me!
Sherry Corbitt, Mortgage Broker
