When you buy a home, you don’t just take on the expense of a mortgage. You also have to cover additional expenses like homeowners insurance, maintenance, repairs, and property taxes.
The latter can be expensive in my home state of New Jersey. With a median property tax bill of $8,928, people in my state often spend a lot of their income on housing. This holds true even when they manage to keep their mortgage payments to a minimum.
Meanwhile, a lot of my friends who own homes make a single payment every month to a loan servicer that covers their mortgage payment, property taxes, and homeowners insurance. But I don’t like the idea of my mortgage loan servicer paying my property taxes for me. Here’s why.
When you’re parting with more money than you need to
It’s very common to make a single payment monthly that covers your property taxes and homeowners insurance on top of your mortgage. What’ll happen is that a portion of that money will be used to pay your mortgage immediately, and the rest will be put into an escrow account to cover your property taxes and homeowners insurance as those bills come due.
Unlike your mortgage payment, which is due every month, property taxes are generally paid quarterly. And your homeowners insurance payment might only come due once a year. So what your loan servicer will do is reserve the extra money you’re paying each month in an escrow account so it can cover those expenses.
You may be wondering why I have a problem with this arrangement. And the reason is that loan servicers want to make sure you’re paying enough into your escrow account to cover those additional expenses as they come due. As such, you’ll generally be charged extra above what those secondary items actually cost.
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As an example, let’s say your monthly mortgage payment is $1,000, your homeowners insurance costs $100 monthly, and your property taxes cost $1,000 a month (in my state, that’s more than possible). So all told, you’d be looking at $2,100. But what your loan servicer might do is charge you $2,200 or $2,300 so it has a cushion.
That’s understandable. But it doesn’t work for me.
Because my property tax bill is so ridiculously high, I know that if I were to have my loan servicer pay it for me, I’d have to send over hundreds of dollars extra each month beyond what I really owe. That’s money I’m not looking to part with before I have to.
An easy way to make sure I don’t forget to pay my property taxes
The upside of having your mortgage loan servicer pay your property taxes (and your homeowners insurance) is that you don’t have to worry about forgetting to pay those bills yourself. They may not necessarily be on your radar since they don’t come up every month.
But an easy step I take to get around that is to set up automatic payments from my bank account once my annual property tax bill arrives. So let’s say that bill comes in August, which it usually does in my neck of the woods. Usually, I’ll have payments due in August, November, February, and May. So I’ll take a look at what I owe, go into my checking account, and then set up those four payments in one session so I don’t have to worry about forgetting later on. That way, I’m not sending anyone any extra money.
If your property tax bill isn’t particularly high, you may just find it easier to have your loan servicer pay that expense for you. And you may not have to put too much extra money in your escrow account. But because my taxes are so darn high, it’s better for me to just pay them myself than have to part with additional funds month after month.