Property Taxes - To pay with your mortgage or not?
Any time I sign up new clients for a mortgage, we always spend a lot of time discussing property taxes. We come to the point in the meeting when the client has to decide to either pay the property taxes with the mortgage payments or on their own. 90% of the time clients ask to pay taxes with the mortgage, as that is what seems easiest or that is what their parents told them to do.
In theory, having the mortgage lender or bank collect the taxes sounds great. You pay them each month and they make the tax payment for you. You don’t need to worry about anything. This practice became popular years ago when the only alternative was paying the taxes directly to your municipality once or twice per year. No one liked getting those massive bills so naturally having the lender collect monthly was welcomed with open arms.
With that being said, having the mortgage lender collect property taxes tends to add a lot of confusion for clients, particularly in the first year of the mortgage term. The reason for this is that lenders like to collect taxes in advance (i.e. they like to have all the money required to pay the tax bill before it becomes due). This can be problematic if there is not enough time between your closing date and the tax bill due date (i.e. you buy in November and tax bill is due in January). The lender will have not yet collected enough to cover the entire tax bill, putting your tax account into a deficit. The lender then needs to make up that shortfall to ensure they have enough money to pay for the next tax bill. They will typically increase the monthly tax payment to make up the difference. This can cause frustration for clients when all of the sudden their mortgage payment goes up by $100 per month.
The alternative, which I always recommend, is to pay property taxes directly to the municipality. This avoids the “middle man” and is a lot more straightforward. Most municipalities now allow you to pay monthly and the payments are withdrawn automatically from your account (so you don’t have to think about it!). They also collect all taxes for the current year within the current year (i.e. all payments made in 2016 will go towards 2016 taxes). You don’t need to worry about them collecting in advance so there are no drastic payment increases. Payments will still go up gradually each year, but that happens regardless of how you choose to pay (unfortunately I can’t stop taxes from increasing!).
Since introducing clients to paying directly through their municipality, I have found that the property tax payment process is a lot more clear and easy to understand. Next time you are faced with how to pay your property taxes, be sure to explore all of your options in detail.