If you're like many homeowners, you've always wondered why your mortgage lender handles your annual property tax payments. After all, you're technically the owner of the house. To the untrained eye, the escrow system on which most mortgage lenders rely to collect and store monthly tax-account deposits seems cumbersome and unnecessary. Many homeowners prefer simply to save up the funds themselves and make a single annual lump-sum tax payment directly to their county or municipality.
Although it creates more work and adds another layer of bureaucracy to the process, mortgage lenders collect extra funds in escrow throughout the year to prevent borrowers from failing to pay city or county taxes when they come due. Local governments regularly place liens on residential properties that carry significant past-due tax balances. In some particularly acute cases, local housing authorities may actually seize severely-delinquent homes to sell at auction for the purposes of recouping these lost revenues. When this occurs, both homeowners and mortgage lenders are forced to take steep losses.
In other words, your mortgage lender is protecting its interests by demanding escrow tax payments. It's also technically looking out for your interests as well. After all, your lender is willing to take care of the clerical issues surrounding your tax payments on your behalf.
However, you may be losing a small but not negligible amount of money by placing your future tax payments in escrow each month. Many homeowners who don't have an escrow-tax arrangement with their mortgage lenders choose to earn interest income by saving for their property-tax payments on a monthly basis. Over the course of a year, homeowners who invest $10,000 in savings accounts or short-term CDs that carry interest rates of 2 percent can earn up to $200 in interest.
If you'd like to try your hand at investing your future property tax payments, you'll need to tell your mortgage lender that you'd like to waive your right to your contract's escrow clause. While you probably won't need to refinance your mortgage in order to do this, you may need to sit down with a loan officer and rewrite the pertinent section of the contract.
Most lenders won't add extra fees to your account as a result of this new agreement. However, you'll need to meet a certain equity threshold in order to qualify for the change. This is typically set at 10 percent of the home's total value.