How are property taxes paid after the loan is paid off
Question: I have a question about what happens to your property taxes when you pay off your mortgage. When you have a mortgage, the payment to the lender includes property taxes and insurance. After you’ve paid off your loan, how are taxes paid? Is it better to pay off your loan or keep a loan so that taxes continue to be paid? Do property taxes go up when you pay off your loan?
A: You’ve asked some important questions, although we think you may be a little confused about how your home and mortgage withholding accounts work.
Let’s start with a basic fact: Whether you have a mortgage on your property does not affect what you pay in property taxes. Your property taxes should be based on the actual value of the home or what your local tax authority believes your home is worth.
Let’s say you bought your house for $ 300,000. The tax authority may base your property taxes on your purchase price or may have some other formula to determine the value of your home. Once it has determined this value, the tax authority fixes the amount of taxes you have to pay on the basis of a complicated formula. For example, if the local tax body says your taxes are $ 3,000 per year, that is the amount you are legally required to pay whether or not you are currently paying off a mortgage.
For most homeowners with a mortgage, the lender requires the homeowner to pay monthly into escrow an amount equal (or slightly more) than the expected amount of property taxes and the current home insurance premium. If your property tax bill is $ 3,000 per year, the lender will set the monthly amount you pay into the escrow account at $ 250. If your home insurance policy is $ 1,200 per year, the lender will want you to pay an additional $ 100 per month to cover future insurance premiums. In addition, the lender may ask you to pay an additional amount, usually limited to two months of insurance premiums and your total property tax bill, in case the bills are higher than expected.
Whatever the amounts, they are added to your monthly mortgage payment. When the lender’s servicer receives the payments, the amount owed to the tax and insurance escrow is segregated and when those bills come due, the lender will pay them. The main reason your lender holds these funds is to make sure those two bills are paid on time so that the insurance policy doesn’t expire and your home isn’t sold for back taxes.
That said, when you pay off your mortgage, your lender is no longer obligated to pay your property taxes and your home insurance premium. From the day you pay off your loan, you must assume the obligation to pay these bills yourself, on time and in full.
If it’s too much to write those checks once or twice a year, when they come due, you can set up your own escrow account and deposit one-twelfth of the amount owed each month into the account. Since your mortgage will be paid off, it will hopefully be easier to find the funds and then remember to foot the bill. (Check with your tax assessor’s office to make sure your home address is on the tax bill, so you can be sure you receive it.)
As you pay off your mortgage, your property tax bill will continue to increase. Recently, we discovered a tax bill that was about 25 years old that made up about a fifth of our current tax bill. Hopefully your income over the decades will continue to increase, so paying a heavier tax bill won’t be too heavy.
Contact Ilyce Glink and Samuel J. Tamkin through their website, ThinkGlink.com.