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Keith Said:

Is it better to add taxes and insurance to your mortgage?

We Answered:

Here are the benefits of escrowing tax and insurance vs. not escrowing...

BENEFITS OF AN ESCROWED LOAN.

1. You don't have to worry about paying your property taxes every year. The mortgage company is responsible for paying your taxes in such a way that they save the most money (most tax authorities give a discount date for early payment).

2. Slightly better interest rate on your mortgage. An escrowed loan is less risky to the lender. If the loan is escrowed, the lender knows that the taxes will be paid (and the county will have no claim to take away the property). Since the loan is less risky, the lender may have a slightly lower interest rate than a non-escrowed loan.


BENEFITS OF A NON-ESCROWED LOAN.

1. If you are not sending one twelfth of your annual tax bill to the mortgage company, then you will be able to gain a slight amount of interest on that money (rather than the money sitting in the mortgage company's bank account). That being said, some states require that mortgage companies pay a small amount of interest on escrow funds they hold. If your annual tax bill is $3000, it's not as if you would collect a full years' worth of interest on $3000 since you only pay approximately $250 per month toward your taxes. If you calculate one month's worth of interest on $250, it's not that much money. Also, mortgage companies are allowed under law to collect slightly more than what they figure they'll need to pay at the end of the year (since they are operating off of an estimated tax anyway). This extra is called a "cushion." If your monthly tax payment is $250, then the mortgage company might collect $260 in case the tax bill is higher than they expect when the actual bill comes.

I have always had escrowed loans and have had no problems with them. It's one less thing you have to worry about. But it wouldn't be the end of the world to have to cut a fat annual check to the county myself. (I just paid off my loan so that's what I'm going to start doing now since I don't have a loan anymore).

Here are my responses to your other questions...

1. You are liable for the property taxes for the year that you buy the property (not the prior year). If you purchase the property a month or two (or even three) before the taxes are due, then the mortgage company will require that you pay the entire tax amount at closing.

2. If the taxes are not due soon after the mortgage is closed, then you would pay the normal escrow payment (the estimated tax bill divided by 12 for each month). The escrow deposit that you will be required to make at closing is to "catch you up" and get you "on schedule" for when the tax and insurance bills come due (whether it's sooner or later).

3. There are NO added costs to having an escrow account for taxes and insurance. The mortgage company is usually entitled to collect a little more (a "cushion") in case the tax and insurance bills are higher than they expected, but this amount is usually negligible. If the money in the escrow account is higher than needed, they cut you a check for a refund. In some states, the mortgage company is required to pay "Interest on Escrow" (Illinois is not one of them as of now) but this "IOE" is negligible. Remember... all taxes and insurance payments are your responsibility. Any money the mortgage company collects (whether in one large lump or several smaller payments) belongs to you. Mortgage companies don't make money (directly) from escrowing loans. They do derive benefits but that's another topic.

4. When the taxes are due depends on your county. Some counties require an annual payment; others require two or even three payments per year. You never pay property taxes for the prior year.

Good luck!