The pros and cons of paying property taxes through escrow vs. direct payment
JPMorgan Chase does not offer tax advice. Please consult a qualified professional for advice about your specific situation.
Quick insights
- Paying property taxes separately from escrow may give you more financial control, but it also means you’ll be responsible for making timely payments to avoid late penalties. Note that for FHA loans, it is required to have escrow account, not optional.
- Managing property tax payments outside of escrow can add complexity to your financial planning, requiring you to set aside funds and track payment due dates.
- To pay property taxes separately from escrow, you may want to consider setting up a dedicated savings account, using a tax calendar, and reviewing your budget and financial goals.
What is an escrow account?
When you have a mortgage, your lender likely requires you to have an escrow account to pay property taxes and insurance. An escrow account is a separate account held by your lender to manage these payments on your behalf. Your lender will typically collect a portion of your property taxes and insurance premiums each month as part of your mortgage payment and hold these funds in the escrow account until the bills are due.
The purpose of an escrow account is to ensure that your property taxes and insurance premiums are paid on time, avoiding late penalties and potential lapses in coverage. Your lender manages the escrow account, making payments on your behalf when they come due.
For example, let’s say your annual property taxes are $3,000 and your insurance premium is $1,200. Your lender may collect $250 per month ($3,000/12 months) for property taxes and $100 per month ($1,200/12 months) for insurance, totaling $350 per month, in addition to your mortgage principal and interest. This $350 would be deposited into the escrow account.
Can you pay property taxes separately from escrow?
Yes, some homeowners might consider paying property taxes separately from their escrow account. This means they would be responsible for making timely payments directly to their local tax authority. Why might you consider doing this? Let’s get into the pros and cons.
Pros and cons of paying property taxes separately
There are potential benefits to paying property taxes separately from escrow. Some of these may include:
- You may earn interest on the funds you set aside for property taxes if you keep them in a high-yield savings account.
- You may have more control over your property tax payments, allowing you to prioritize other financial goals or expenses.
At the same time, it’s worth noting the following risks:
- You’ll be responsible for making timely payments to avoid late penalties. If you miss a payment, you could be hit with fees and potentially even a tax lien on your property.
- You may need to manage your cash flow carefully to ensure you have sufficient funds for property tax payments.
- Additionally, managing property tax payments separately can add complexity to your financial planning, as you’ll need to ensure you have sufficient funds set aside for these payments.
- Failure to pay property taxes on time may result in additional penalties, interest, or foreclosure by the taxing authority.
To manage property tax payments effectively outside of an escrow account, you may want to consider setting aside funds in a dedicated savings account or using a tax calendar to keep track of payment due dates. You might also want to review your budget and financial goals to determine whether paying property taxes separately aligns with your overall financial strategy.
Before opting out of escrow for property taxes, confirm with your lender whether this is permitted under your mortgage agreement. Some loans, including many government-backed loans, require escrow for property taxes and insurance.
Should you pay property taxes in escrow?
To determine whether paying property taxes separately from escrow makes sense for you, you may want to consider your individual financial circumstances, including your income, expenses and financial goals. You might also want to review your lender’s requirements and local regulations regarding property tax payments.
Some key factors to consider when deciding whether to pay property taxes separately include:
- Your ability to make timely payments and avoid late penalties
- Your financial goals and whether paying property taxes separately aligns with them
- Your lender’s requirements and any potential implications for your mortgage
You may also wish to consult with a qualified professional regarding any applicable state or local laws that could affect your ability to pay property taxes outside of escrow.
Tips for navigating the process
To set up separate property tax payments, you may need to notify your lender and make arrangements for payment. You might also want to review your budget and financial plans to ensure you’re prepared for the added responsibility.
Some tips for managing property tax payments effectively include:
- Setting aside funds in a dedicated savings account
- Using a tax calendar to keep track of payment due dates
- Reviewing your budget and financial goals to ensure alignment with your property tax payment plan
- Confirming with your lender and local tax authority the correct procedures and deadlines for direct payments.
In summary
Paying property taxes separately from escrow can offer more control over your payments, but it also comes with added responsibilities and potential risks.
By understanding the implications and managing your payments effectively, you can make informed decisions that align with your financial goals. You may want to consider consulting with a financial advisor, tax advisor and/or mortgage expert to determine the best approach for your individual circumstances.
