Paying your property taxes can be a bit of a mysterious process, especially if you’re making payments into an escrow account managed by your mortgage company. Tax bills aren’t issued until mid-October through early November, yet you make monthly payments set by your mortgage company all year and hope that it is enough to cover the bill. Couple this already puzzling process with protesting your taxes, and you may be wondering “am I really saving money?” and “where are my tax savings?”. It’s necessary to know how your escrow account functions in order to understand how your potential tax savings are realized.
What is an escrow account?
Escrow accounts are used in conjunction with your mortgage loan. They act as a savings account to hold money to pay for property taxes. Each month, the mortgage payment you make includes a portion that goes towards paying your loan and a portion that goes into the escrow account. The amount in the escrow account will be used to pay your property taxes at the end of the year.
The amount you pay into escrow each month is determined by your mortgage company and is based on the estimated yearly total you will owe for property taxes. The grand total is divided by 12 to reach the monthly payment amount. Many properties see an increase in value year-after-year. When that happens, your lender will increase your estimated taxes, and your monthly mortgage payment will go up to account for the expected increase.
How is my escrow account related to my property taxes?
When tax bills are issued by the tax assessor’s office, usually between mid-October and early November, your mortgage company will use the funds in your escrow account to pay the bill. If the amount of the tax bill is greater than what is in the escrow account, your lender will come to you for an additional payment to make up the difference. If the tax bill is lower than what is in the account, your lender would owe you a refund or a credit towards the following year’s tax bill.
When a reduction in taxes is achieved through a property tax protest, the tax bill that is sent to your lender will reflect the lower amount. In other words, your mortgage company will be paying less taxes on your behalf as a result of the protest. This directly affects the amount of the shortage you need to cover through an additional payment or the amount of the refund or credit that is due to you. Finally, every mortgage company treats this situation in their own unique way, so it is best to contact your lender to help guide you through the remainder of the process.
Still confused about realizing property tax savings through an escrow account? Click here for an example of how this process works.