Over the course of every year, I receive many questions regarding the payment of one’s property taxes. Should one be paying your property taxes as a part of your mortgage or on your own with the Municipality or City? The truth is, it does not really matter. You are not better-off or worse-off by doing it either way.
You are probably familiar with the option of paying your property taxes directly to your local municipality. You would either obtain your tax bill in the mail and pay it when it is due, or you would arrange the tax payment to be directly taken from your bank account on a frequency that suits you best.
Paying your property taxes as a part of your mortgage payment can be classified as a convenience for some people, a requirement for other, or both.
On one hand, it is convenient for some people to have their taxes paid as a part of their mortgage. If you are making monthly mortgage payments, your payment would be increased by 1/12th of your annual tax bill. For example, if your annual taxes are $2,400, your monthly mortgage payment would be increased by $200. The municipality would annually send the tax bill directly to the bank, and the bank would amend your tax payments as they increase year after year. You will have a piece of mind knowing that the taxes are paid, and will not have to think about it anymore.
On another hand, some borrowers are “required” to make their tax installments as a part of their mortgage payments. This is usually the case with insured mortgages, especially those with 5%, and 10% down payment. With the low down payment, these mortgages are classified as higher risk to the bank and the mortgage insurance company. In case you ever defaulted on your mortgage and the bank had to sell your property, there is a higher possibility that the bank will not be able to recover enough money from the property sale to pay off their mortgage. And if there was an outstanding property tax balance, the municipality would be paid off before any money from the sale would be used to pay off the mortgage. In cases like this, the bank would prefer to know that your taxes are up-to-date, and what better way to do it than to control the payment of your property taxes.
The payment of your property taxes as a part of your mortgage is set up in the following way. The bank creates a tax account which becomes a part of your mortgage. Every time you make a mortgage payment, the tax portion of the payment is re-directed to that account. Your tax account would grow, payment after payment, and when the time to pay taxes arrives, the municipality would simply debit your tax account for the amount that is due. It is the bank’s responsibility to ensure that there is enough money in your tax account at the time when the taxes are due.
In order to do this, the bank would usually increase your tax payment in the first year of your mortgage, typically up to 50%. After one year, or however long it takes for the balance to be built up, the tax portion of your mortgage payment would decrease to the original 1/12th amount, in our case $200.
It is important to note that not all financial institutions offer the option to pay your property taxes as a part of your mortgage. Some of the financial institutions simply don’t have the infrastructure to handle the process, while others don’t offer it with certain mortgage products, such as Home Equity Lines of Credit.
If you are not paying your property taxes as a part of your mortgage, but are interested in doing it, talk to your bank. It might be one more thing that you can take off your plate.
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