Our New Home
We just purchased our first home. As long as we own this home, we’re going to have to pay property taxes to the county, city, community college, and the local school district. Bummer. I know. Even worse, we live in Texas, where there is no state tax on income. Therefore, our property tax rates are pretty high (in total, they are about 2.15% of the value of our home) to make up the difference.
This year we’re somewhat off the hook because the home has been assessed at the value of the land only, or $34,600 (that’s because they value it at the beginning of the year…and since it was just built, there was only dirt back in January). However, next year, we’ll have to pay the 2.15% times the full value of the home. Yikes!
Property Tax Escrow Account
Most people have their mortgage company escrow or collect their property taxes every month along with the mortgage payment. This is the easy way to do it, I guess. But it’s not for me. I’d rather be responsible for this annual payment and hold my money in my ING DIRECT savings account until that point. This way, I can benefit from keeping my money longer.
Doing It Yourself Can Payoff
I did a quick calculation using youngmoney.com’s savings calculator based on owing $6000 in property taxes at the end of 2008, and here’s what I found:
Based on monthly contributions to our savings account of $500, which would earn interest of 4.10% (compounded monthly), we would have $6,135 saved by the end of 2008. Not only will we have saved the required amount for property tax payment, but we will have earned an extra $135. Seems worth it to me, even more so because we can automate the savings with ING DIRECT and forget about it.
One Side Note
When we purchased the home, one of the closing costs that we were charged was a loan discount fee of $412. I was told we were charged this because we wanted to pay our own property taxes. We tried to negotiate out of this with no luck. Therefore, to be fair, it will take us three years to start truly earning money off this method. We plan on staying in the house at least seven so, we’re all good there.
How to Change to the DIY Method
If you’ve been allowing your mortgage company to escrow your taxes, and you want to switch to the do-it-yourself method, I’m assuming all you’d have to do is call your lender and tell them to stop. Be aware, some lenders will require you to have 20% equity before you can do this.
Does anyone else use this method? Is there a way to earn even more interest? CDs? Tell me how you are handling your property taxes.
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Bankrate.com has an excellent write up on this issue. Check it out @ http://www.bankrate.com/brm/news/mtg/20010419a.asp
I just sent an email to my mortgage company asking them what the process is for me to handle my own escrow. I am still waiting for a reply. They take out way too much money and I now have over $1k in my escrow account after all the taxes and insurance have been paid. I know I will get this money back but this money could be working for me instead of them.
@ SingleGuyMoney – Thanks for pointing out that the mortgage company often over or under collects.
Please let me know what your mortgage company says, and who you’re with if you don’t mind sharing. I’d be interested to know if I should have waited to do my own escrow after close to avoid the extra closing fee.
We must be neighbors…I am in the exact situation. Partial tax bill for this year, taking on the full bill next year. I just called my mortgage co, county appraiser, and insurance carrier and made all the changes over the phone. Roughly 30 minutes to do it all.
http://twonickels.wordpress.com/2007/12/31/extra-money-by-nixing-my-escrow-account/
So you say you will earn 135$ (that is if the APR stay the same)yet you have to pay 412$ fee… for the ability of…!!!, I don’t see the logic
Let me read it ones more.
@ Two Nickels – Thanks for sharing your similar story. I’m curious who’s your mortgage co.? I wonder if all companies will let you do this without paying a fee. Did I get ripped of for paying this extra fee during closing?
@ Nick – Yeah, it will take three years to make up the true dollar difference of the closing cost vs the interest earned. Still worth it in my opinion because I’ll be there longer than that and I get to have control over my payments. I here stories all the time of over under collection of prop taxes. I like having the control.
You can get another advantage if your standard deduction is just a little higher than what you could get if you itemized and if your taxes or insurance are due soon after the first of the year.
What you can do is pay it after the first of the year (but before the deadline) one year and before the first of the year the next year. In that second year, you can itemize your deductions and have a lower tax bill because you’ve paid twice as much in taxes or insurance. Then next year, you’re waiting until after the first again, so you’ll go with the standard deduction.
**
Note, this is dangerous for people who would be tempted to pull money out of that account for something else.
The interest on your savings account is income and is thus taxable to you. That means you’re really earning about $100 in interest after taxes, and it’ll take more like four years to make up the “loan discount fee.” Additionally, you have the hassle of having to pay your tax bills yourself.
Mine is Wells Fargo, I’m going to call them tomorrow and see if we can stop the ESCROW crap, I would rather save and pay myselft. You could also put that on a credit card and get a free meal out of it!
@ Anne – Thanks for pointing those two things out. Foolish of me not to include a point about taxes. For me, watching my money grow and making one payment aren’t much of a hassle though. That being the case, I think I’ll still take my chances with the DIY method. Thanks for your comment.
@ OurDebtBlog – Please keep us updated on what you decide to do. You’re right, I see that my taxes can be paid via cc as well. That may balance out the taxes that Anne mentioned. Thanks!
I don’t know about Texas but in my area the property tax is paid twice a year. Half is due in April, the other half in October. In that case, the interest earned is about $60 at the end of the year. Put a 25% federal income tax on it, it goes down to $45. If you had to pay $412 up front to earn $45 a year, you should count the lost interest on that $412 too.
Thanks so much for this post! I was thinking about trying to refinance to get rid of the escrow account, but your post made me decide to try to email our mortgage company, Wells Fargo, first.
Wells Fargo sent us a letter in the mail yesterday saying that if we call them, they will remove the escrow account. Woohoo!!!
I plan on doing a blog post about it later this month and I’ll be sure to link back to this post as my inspiration
@Becky – That’s awesome! Thanks for sharing and yes, I’d love to hear your followup story. Let me know when you do and I’ll post a link to yours.
I’m a little late getting into this thread, but I recently got out of my Wells Fargo escrow account. I had sent them an email through my Wells Fargo account asking if it was possible to get out of the escrow program. First thing next morning I get an email back from them saying that my escrow account had been closed and I would need to contact my tax authority and insurance company to make arrangements to pay for them myself… I was just asking the question! Oh well, guess it was for the better anyway.
@Mike – Wow. That’s crazy. See, even the mortgage company employees know it’s a better deal for ya. Good luck staying on top of it.
I have Citi Mortgage and they make you jump through quite a few hoops in order to remove escrow. you must of had your loan for 1 year in perfect standing or no late payments and escrow balance must be + or at a zero balance and taxes can not be due 60 days prior to removing escrow. and 80% or less loan to value. so what i have to do is go to the county and pay 6 months of property taxes and send proof to citi bank and then they send a letter that i have to sign and send back and then they would take it off. for us they had an extra 2,000 after taxes and insurance floating in our escrow…
@Aaron – That sounds like an awful lot of hoops to jump through. I wonder if it’s easier once you have 20% equity in your home?
I have about $4000 in my escrow account and recently received and paid my property tax of $2000+ myself, upon receiving the bill in the mail. Was this what the escrow balance is for? And if so, how does the mortgage company pay those bills? First time homebuyer…thanks!
Ann,
You should definitely call up your mortgage co and ask why they haven’t paid your property taxes with your escrow. That’s why you pay money into the escrow…so they will have the money to pay your taxes.
Without knowing your full details it’s hard to provide a complete answer. Since I’ve never paid into escrow (I save for property taxes myself), I don’t really know how the mortgage co. pays them. I’m sure it varies from co to co.
I would suggest calling your mortgage co and discussing it. Good luck.
Don’t forget! That $412 is considered tax deductible for the year of the purchase! Doesn’t recoup your whole $412 on your 1040, but every little bit helps!
@Ann,
Are you speaking of personal property taxes or real estate taxes? If your mortgage company is holding escrow deposits in an account for you, then you would have never even recieved a bill for real estate taxes. The bill would have went directly to your mortgator.
Not always true about the mortgage company directly receiving the bill.We have Wells Fargo and receive our property tax bill every year.Then we have to forward it to them.