The Hidden Costs of Homeownership: Why I Choose Not to Have My Mortgage Loan Servicer Pay My Property Taxes
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. These additional costs can add up quickly and significantly impact your monthly budget. This is especially true in states like New Jersey, where property taxes are notoriously high.
In New Jersey, the median property tax bill is $8,928. Many homeowners in the state spend a large portion of their income on housing, even when they try to minimize their mortgage payments. Given the significant burden of property taxes, some homeowners choose to have their mortgage loan servicer pay their property taxes for them. However, I prefer to handle this expense myself, and here’s why.
When you make a single monthly payment that covers your mortgage, property taxes, and homeowners insurance, a portion of that money is immediately used to pay your mortgage. The rest is put into an escrow account to cover your property taxes and homeowners insurance as those bills come due. While this arrangement may seem convenient, it comes with a catch.
Property taxes are generally paid quarterly, unlike monthly mortgage payments. Additionally, homeowners insurance payments might only come due once a year. To ensure that there is enough money in the escrow account to cover these expenses, loan servicers often charge extra above what these secondary items actually cost.
For instance, if your monthly mortgage payment is $1,000, your homeowners insurance costs $100 monthly, and your property taxes cost $1,000 a month (which is possible in high-tax states), your total monthly payment would be $2,100. However, your loan servicer might charge you $2,200 or $2,300 to have a cushion in the escrow account.
While this practice is understandable, it doesn’t work for everyone. In my case, with a disproportionately high property tax bill, I would have to send hundreds of extra dollars each month, above what I owe, if I were to have my loan servicer pay my property taxes for me. That’s money I’m not willing to part with before I have to.
To ensure that I don’t forget to pay my property taxes myself, I have found an easy solution. Once my annual property tax bill arrives, typically in August, I set up automatic payments from my bank account for the payments due in August, November, February, and May. This way, I don’t have to worry about forgetting to make these payments. It allows me to pay my property taxes directly without having to send any extra money to my loan servicer.
Of course, if your property tax bill is not particularly high, it may be easier to have your loan servicer pay that expense for you. In such cases, you may not have to put too much extra money into your escrow account. However, if your property taxes are substantial, like mine, it may be more advantageous to pay them directly to avoid additional funds being held in escrow each month.
In conclusion, while it may be convenient to have your mortgage loan servicer pay your property taxes and homeowners insurance, it can come at a cost. For homeowners with significant property tax bills, like those in high-tax states, it may be more financially beneficial to handle these expenses directly. By paying property taxes myself and setting up automatic payments, I can ensure that I don’t forget while not parting with unnecessary funds before they are due.