Property Taxes and Your Mortgage
The rules and amount vary widely from state to state, but everyone pays property taxes. In fact, this is usually the main source of local government funding and is generally based upon the home’s value. How these taxes get paid is often a source of confusion to homeowners, particularly first-time homebuyers.
The first question you might ask is why lenders even care about taxes. The reason is that unpaid property taxes are a superior lien to the rights of the lender. If a lender gets the property back through foreclosure, there are almost certainly going to be unpaid property taxes. The lender is going to have to pay. Lenders don’t feel that this is their job, and I don’t blame them.
That’s why almost every loan contains a provision that you will pay the property taxes when due and that the failure to pay the property taxes is an “event of default.” This means that if you are delinquent on taxes, your lender could, theoretically, foreclose on your property even if you have been making all of your mortgage payments on time.
How would the lender know this? You probably don’t remember this, but when you signed your loan documents there was a charge of about $75 for “Tax Service.” This pays for a third-party company whose business it is to go to all the County Offices in the country some period of time after taxes are due and to get a list of all delinquencies. They then notify your lender that you are late! The lenders seldom foreclose based upon your failure to pay taxes, but you can be assured that they will write you a “strongly-worded” letter reminding you of your obligations.
The strange situation is that a far larger number of people than you might believe – I have heard that the number is over 30% in some areas – do not pay their taxes on time. I am fairly certain that a really small number, some fraction of 1%, actually lose their homes because of failure to pay taxes, but that doesn’t mean that lenders don’t care.
Let’s assume that you are a lender that is servicing 3,000,000 loans. (Servicing is the terminology for collecting payments and managing the loan.) Let’s say that only 10% of people don’t pay their taxes the next time they are due. That’s 300,000 letters you’d have to write! The postage alone is $117,000. You’d need a pretty big department to handle that. Not only that, they now have to check to make sure that you paid it when they get your letter saying that you did pay it. Lenders/servicers don’t get paid for that.
That’s how the idea of the impound account, or escrow account as it’s called in many areas, came up. In order to prevent this costly exercise that they don’t get paid for, an important issue from their perspective, they invented the idea of you paying one-twelfth of your taxes every month along with your regular mortgage payment. Then, when the taxes are due, they send a check to your County Tax Collector. I think that they even save postage because I’m sure that most large counties can now accept electronic funds transfer.
The huge objections to this were always that, “The bank has my money and they don’t pay interest,” and “They keep a lot more than they need.” Many states - I am not sure how many - now pay interest on the impound balances, although it’s not much. Heck, these days you wouldn’t even earn that much if you kept it in a savings account.
The other aspect – how much they are allowed to keep – is now governed by Federal law. They are allowed only a small cushion and are required to calculate the balances and return to you any more than the mandated maximum.
In most Eastern states, lenders are used to having these impound accounts and state laws protect their rights to demand that you have one. However, the laws in other states are more consumer-friendly. In California, for example, a lender can require impounds only where the loan is greater than 90% of the value of the home when they did the loan.
It’s not like all aspects of impound accounts are bad. Those Eastern lenders didn’t like it when they came out to California to do loans and were told that they couldn’t have impounds. So they started offering quarter-point pricing incentives. That’s $1,000 reduction in fees on a $400,000 loan. I can guarantee you that it is worth $1,000 to let them do it for you.
Also, many homeowners like the convenience of never having to worry about paying the tax bill. In California, taxes are late if not paid by December 10th – right when you need extra money for Christmas – and April 10th – right when your income taxes are due. Not good timing!
Like most things in life, there are plusses and minuses. I think you have more important things to worry about.
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