Property tax accounts

This is the one mortgage feature that really aggravates home buyers and home owners. Unpaid property taxes are a special lien against a property that rank even higher than a first mortgage. To ensure they retain their first-rank status at all times, many lenders insist that borrowers pay part of the estimated annual property taxes to the lender with each mortgage payment. (It's one-twelfth if the mortgage is paid monthly, and the appropriate percentage for weekly, bi-weekly, or semi-monthly payment mortgages.) These funds are placed in a "property tax account," with the lender paying the property taxes directly to the municipality as the payments come due.

Lenders always emphasize the convenience of tax accounts. Combining the mortgage and taxes into one payment means borrowers can avoid a huge lump-sum disbursement when an installment comes due. But like most things convenient, tax accounts are costly.

Property tax accounts can absolutely devastate the cash flow of a home buyer or home owner. Typically, three types of property tax payments are necessary:

• the balance of the current year's taxes, to bring the account up-to-date as of December 31;
• a lump-sum "initial contribution," to establish a tax account (since all the current year's taxes have been paid, this means a portion of next year's taxes is being paid now; this sum is usually deducted from the mortgage advance, to ensure it is paid);
• the "tax component," with each regular mortgage payment; this could represent part of next year's taxes as well.

Lenders like to have enough funds on hand to honor the tax bills as they are issued. Since those tax bills are issued on an interim and final basis, a tax account could have on deposit at anyone time the taxes due for the next six months.

When a mortgage is being discharged, any credit balance in the tax account is used to reduce the amount of the principal owing. Any debit balance increases the amount of the money owing to the lender. Since most tax accounts are maintained in a credit balance, this is a small saving grace to borrowers retiring a mortgage.

It's important to know that not all lenders insist on a tax account. Some will suspend the requirement on request, if borrowers have sizeable equity in their property (30% or more) and a good credit rating. Then the borrower must produce receipted tax bills annually, with the lender reserving the right to enforce the tax account requirement if property taxes are ever unpaid.

Few lenders want to lose a good-quality borrower to another lender over the issue of a tax account. One of the few discretions that mortgage officers have at the branch level is the power to waive or suspend the need for a tax account. Keep that in mind when shopping for a mortgage.

Many borrowers find tax accounts offensive. If a lender can entrust them with the principal amount of the loan, why does it feel insecure about a small portion of that being paid? If paying your own property taxes is important (as it is to most people), ask for that right. And get it in writing, whether in the mortgage document or a side agreement.

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