Norah Tanner is back to explain what escrow accounts are, why we have them on our mortgages, and how to monitor them.

Understanding Property Taxes Paid Through Escrow: What You Need to Know

Property taxes are a critical aspect of homeownership, and managing them correctly ensures you stay compliant with local regulations and avoid unexpected financial burdens. When you pay your property taxes through an escrow account, it can simplify the process, but it’s important to understand how it works. Here’s a guide to help you navigate property taxes paid through escrow.

What is Escrow?

Escrow is a financial arrangement where a third party holds funds on behalf of the borrower and lender. For property taxes, an escrow account is set up as part of your mortgage payment plan. Each month, a portion of your mortgage payment is deposited into the escrow account, which is then used to pay property taxes and sometimes homeowners insurance.

How Property Taxes are Paid Through Escrow

Monthly Payments:

Your lender will estimate the annual property tax amount and divide it by 12 to determine how much to add to your monthly mortgage payment. This amount is deposited into your escrow account each month.

Annual Review:

Once a year, your lender will review the escrow account to ensure it has enough funds to cover the property taxes. They’ll adjust your monthly payments if necessary to account for any changes in tax rates or insurance premiums.

Tax Payments:

When property taxes are due, your lender will use the funds in your escrow account to pay the taxes directly to the local tax authority. This ensures your taxes are paid on time, avoiding any late fees or penalties.

Benefits of Paying Property Taxes Through Escrow

Convenience:

Paying property taxes through escrow simplifies the process, as you don’t have to worry about making separate payments or remembering due dates. Your lender handles the payment on your behalf.

Budgeting:

Spreading your property tax payments over the year through your mortgage can make budgeting easier. Instead of facing a large tax bill at once, you pay smaller amounts each month.

Avoiding Penalties:

Since your taxes are paid automatically from your escrow account, you reduce the risk of missing a payment or incurring late fees.

Potential Drawbacks

Escrow Shortages:

If there isn’t enough money in your escrow account due to changes in tax rates or other factors, you may face an escrow shortage. This could result in an increased monthly payment to make up the difference.

Less Control:

With escrow, you relinquish control over the timing and handling of your property tax payments. Some homeowners prefer to manage their tax payments directly to ensure they’re handled according to their preferences.

Annual Adjustments:

Your monthly payment can fluctuate based on annual reviews of your escrow account. This can lead to unexpected increases in your mortgage payment if your property taxes or insurance premiums rise.

Managing Your Escrow Account

Review Statements:

Regularly review your escrow statements to ensure the correct amounts are being deposited and used. This can help you catch any discrepancies early.

Communicate with Your Lender:

If you notice any issues or have questions about your escrow account, contact your lender for clarification or to make necessary adjustments.

Plan for Changes:

Be prepared for potential changes in your monthly payment if your property taxes or insurance premiums increase. Understanding how these adjustments are calculated can help you manage your budget.

Paying property taxes through escrow can streamline the process and offer peace of mind by ensuring timely payments and simplifying your budgeting. However, it’s essential to understand how escrow accounts work, monitor your statements, and communicate with your lender to manage any potential issues. By staying informed and proactive, you can make the most of the convenience that escrow accounts provide while maintaining control over your finances.