We just purchased our first home.
As long as we own this home, we’re going to have to pay property taxes.
These property taxes include payments 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.
How Much Are Property Taxes in Texas
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 an online savings account until the end of the year. This way, I can benefit from keeping my money longer, and more importantly, have more control.
I did a quick calculation using youngmoney.com’s savings calculator based on owing $6,000 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 the year.
Not only will we have saved the necessary amount for making our 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 Capital One 360 and forget about it.
Update: Rates aren’t as high as they were when I first wrote this article, so be sure to check current rates on my list of the best online savings accounts to do a more accurate calculation for yourself.
Watch for the Escrow Waiver Fee
When we purchased the home, one of the closing costs that we were charged was an escrow waiver 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.
If you’re buying a house and facing this fee, consider how long it will take you to earn enough interest for this to be worth it. Another thing to consider is doing the mortgage with escrow and then waiting a year to contact the lender about removing escrow. They may not charge you a fee at that point.
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, 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. And some may charge you a fee to do this.
Update: A Reader’s Example
Motivated by my post, Becky from FamilyandFinances.com contacted her mortgage company and got rid of her escrow account. Here’s an excerpt from Becky’s post:
“I was a little skeptical about my mortgage company, Wells Fargo, being willing to give up what was for them an easy money-maker. Nonetheless, I sent them an email asking about removing our escrow account. They sent a message back saying that we could do it if we qualified…”
Becky will actually be getting more money back than they actually owe on their taxes because the mortgage company was keeping a $500 reserve. She’s using the money to meet some of her financial goals. Way to go Becky. Thanks for sharing your story.
Does anyone else use this method? Is there a way to earn even more interest? Peer lending? Tell me how you are handling your property taxes.