Can You Pay Property Taxes Separately From Your Mortgage? A Homeowner’s Deep Dive

Yes, absolutely! You can pay your property taxes separately from your mortgage in most cases. Whether you should is a different question entirely, and one we’ll unpack in detail. This decision has implications for your budget, your potential for accruing interest, and even your peace of mind. Let’s dive into the ins and outs of handling property taxes, separating fact from fiction, and helping you make the best choice for your financial situation.

Understanding Property Taxes and Escrow Accounts

Before we delve into the mechanics of separate payments, let’s establish a solid understanding of property taxes and how they traditionally interact with mortgages.

What Are Property Taxes?

Property taxes are ad valorem taxes (meaning based on value) levied by local governments – typically counties, cities, and school districts – on real estate. The amount you pay is determined by the assessed value of your property and the local tax rate. These taxes fund crucial public services like schools, infrastructure, and emergency services. Ignoring these taxes can lead to serious consequences, including penalties, liens on your property, and ultimately, foreclosure.

The Escrow Account System

Many homeowners, especially first-time buyers, are accustomed to paying their property taxes (and sometimes homeowner’s insurance) through an escrow account managed by their mortgage lender. This is a convenient system where a portion of your monthly mortgage payment is allocated to cover these expenses. The lender then pays the tax bills directly to the local government on your behalf, ensuring they’re paid on time. Lenders often require an escrow account if your down payment is less than 20% to mitigate their risk of losing the collateral (your home) due to unpaid taxes.

Paying Property Taxes Separately: The Pros and Cons

Now that we’ve covered the basics, let’s explore the advantages and disadvantages of taking control and paying your property taxes separately.

Advantages of Separate Payment

• Greater Financial Control: You have direct control over when and how you pay your taxes. This can be advantageous if you prefer to budget strategically or take advantage of early payment discounts (if offered by your local government).
• Potential for Interest Earnings: Instead of your funds sitting in an escrow account earning minimal (if any) interest, you can keep the money in a high-yield savings account or other investment vehicle. Over time, the interest earned could offset a portion of your tax bill.
• Avoiding Escrow Account Errors: While rare, lenders sometimes make errors in managing escrow accounts. Paying separately eliminates the risk of your lender accidentally missing a payment or miscalculating the amount due.
• No More Cushion Requirements: Lenders often require a cushion in your escrow account to ensure there are sufficient funds to cover potential tax increases. Paying separately eliminates the need for this cushion, freeing up cash flow.

Disadvantages of Separate Payment

• Increased Responsibility: The onus is entirely on you to remember payment deadlines and ensure taxes are paid on time. Missed payments can result in penalties, interest, and even a tax lien on your property.
• Potential for Overspending: Without the discipline of a monthly escrow contribution, it can be tempting to spend the money earmarked for taxes on other expenses. This can lead to a stressful scramble to gather funds when the tax bill arrives.
• Higher Mortgage Interest Rate (Potentially): If your loan-to-value ratio is high (meaning you have a small down payment), your lender might charge a slightly higher interest rate if you waive the escrow account requirement. This is because they perceive a higher risk.
• Difficulty in Tracking Expenses: Some homeowners find it easier to track their housing expenses with a single monthly mortgage payment that includes taxes. Separate payments require more diligent record-keeping.

How to Switch to Paying Property Taxes Separately

If you’ve weighed the pros and cons and decided that paying property taxes separately is right for you, here’s how to proceed:

1. Review Your Mortgage Agreement: Carefully examine your mortgage documents to determine if you have the right to waive the escrow account. Some lenders have restrictions, especially for borrowers with low down payments.
2. Contact Your Lender: If your mortgage allows it, contact your lender and request to have your escrow account closed. They will likely require a written request.
3. Receive Your Escrow Balance: Once the escrow account is closed, the lender will refund any remaining balance to you.
4. Set Up Payment Reminders: Ensure you have a reliable system for tracking payment deadlines and making timely payments to your local tax authority. Consider setting up calendar reminders or automatic payments.
5. Confirm Payment with Tax Authority: After making your first separate payment, confirm with your local tax authority that the payment was received and credited to your account.

Frequently Asked Questions (FAQs) About Paying Property Taxes Separately

Here are 12 frequently asked questions related to paying property taxes separately from your mortgage.

FAQ 1: Can I pay my property taxes online?

Yes, in most jurisdictions, you can pay your property taxes online. Check with your local tax authority for accepted payment methods, which often include credit cards, debit cards, and electronic checks. Be aware that some methods may involve a processing fee.

FAQ 2: What happens if I don’t pay my property taxes?

Failure to pay your property taxes can have severe consequences. The local government can place a tax lien on your property, which gives them the right to seize and sell your property to recover the unpaid taxes. Penalties and interest charges will also accrue.

FAQ 3: Will my mortgage lender let me pay separately if I have a low credit score?

Lenders are primarily concerned with your loan-to-value ratio when deciding whether to allow you to waive the escrow account. While a low credit score might not directly prevent you from paying separately, it could indirectly affect your loan terms, potentially making the lender less willing to waive the requirement.

FAQ 4: How do I find out the exact amount of my property tax bill?

Your local tax assessor’s office sends out property tax bills annually (or semi-annually, depending on your location). You can also typically find this information on the tax assessor’s website by searching for your property address.

FAQ 5: Are property taxes deductible?

Yes, property taxes are generally deductible on your federal income taxes, subject to certain limitations. The Tax Cuts and Jobs Act of 2017 limited the deduction for state and local taxes (SALT) to $10,000 per household.

FAQ 6: Can I pay my property taxes with a credit card?

Many jurisdictions allow you to pay your property taxes with a credit card, but be aware that there may be a convenience fee charged by the payment processor. Weigh the cost of the fee against any rewards or cashback you might earn on your credit card to determine if it’s a worthwhile option.

FAQ 7: Is it better to pay property taxes early?

Some local governments offer discounts for paying your property taxes early. Check with your local tax authority to see if such discounts are available in your area.

FAQ 8: How often are property taxes assessed?

Property taxes are typically assessed annually, although some jurisdictions may reassess property values more frequently. Reassessments can lead to changes in your tax bill.

FAQ 9: Can I appeal my property tax assessment?

Yes, you generally have the right to appeal your property tax assessment if you believe it’s inaccurate or unfair. The process for appealing varies by jurisdiction, so contact your local tax assessor’s office for details.

FAQ 10: What is a supplemental property tax bill?

A supplemental property tax bill is issued when your property’s assessed value increases significantly, usually due to a purchase or new construction. This bill covers the difference between the previous owner’s tax liability and your new liability based on the increased value.

FAQ 11: If I refinance my mortgage, will I automatically have to set up an escrow account again?

Not necessarily. Whether you need to set up an escrow account again when refinancing depends on your lender’s requirements, your loan-to-value ratio, and your credit history. You may be able to negotiate to waive the escrow account requirement.

FAQ 12: How do I find my local property tax assessor?

You can find your local property tax assessor by searching online for “[your county] tax assessor” or “[your city] tax assessor.” The assessor’s office is responsible for determining the value of properties for taxation purposes.

By carefully considering these factors and understanding the implications, you can confidently decide whether paying your property taxes separately from your mortgage is the right choice for your individual circumstances. Always consult with a financial advisor or tax professional for personalized advice.