Q: If my tax payment is included in my mortgage payment, am I allowed to go to the local tax office and prepay the taxes before the due date to reduce my monthly payment amount?
A: In theory, what you’re trying to do is reduce your monthly payment by sending money to your local tax officials. It sounds like a good idea, but it won’t work. Worse, you could get into a lot of trouble if you try it.
Here’s why: On Day One, you walk into the tax office and pay your tax bill for the year in the amount of, say, $2,400. On that same day, you’d have to notify your lender that you paid the tax bill.
Here is where it gets interesting. If your lender ignores the payment you've made (which it could do), the lender may send in the tax payment anyway. Now you have a duplicate payment of the tax bill with the lender saying that they were responsible for the payment. You'd have to apply for a refund. If you simply subtract the amount of the tax bill from your monthly payments, the lender may claim that you're now behind in what you owe, and you could suddenly be reported as paying late on your credit.
Let’s say that instead of ignoring you, the lender doesn’t pay the tax bill. So you’ve paid your tax bill, but the amount of your monthly payment would still stay the same. Your monthly mortgage payment will not go down until your lender reevaluates the tax escrow amounts in your account.
Your lender is obligated to review your tax escrow account on an annual basis and determine whether the amount in your escrow account is accurate or whether there is too much or too little money in the account.
If the account has too much money, the lender can mail you a check for the overage. If the account has too little money, however, the lender will ask you to deposit more money into the account or bill you an increased escrow amount for the next 12-month period. (By law, the lender is allowed to keep a full year's worth of taxes in your account, plus a small amount extra in case taxes go up.)
Taking a step back, your loan payment is probably composed of the repayment of your loan (interest and principal) and approximately 1/12 of your annual property tax bill and your homeowners insurance premium (if that is also an escrowed amount).
If you make the tax payment and the lender reconciles your account shortly thereafter, your loan payment will remain the same since the lender will return the escrow money to you and start the process over of collecting $200 per month for the taxes (1/12 of the $2,400 tax bill). At this point, your prepayment of the taxes has done nothing for you and your monthly payment will probably stay around the same.
If you are looking to pay your own taxes when they come due, you should, instead, talk to your lender and figure out if you are eligible to have the escrow for real estate waived. If you are eligible to waive it, your monthly payment would be lower and you’d handle the payment of the taxes directly with the government agency.
Finally, if your goal is to lower your monthly costs for your home ― that is your mortgage, insurance and real estate tax payments — you’ll need to make sure you are paying the right amount, and not too much, for your insurance. You should shop around for your insurance coverage; and if you get a lower rate, make sure your lender is aware of the switch in insurance providers and the new premium cost.
A second thing you might want to do is to contest the amount you pay in real estate taxes with the taxing body. All real estate taxing bodies have a method of calculating the real estate taxes. If there are any problems with the formula that goes against you, you need to correct that. It could lower your property tax bill significantly. (And, don’t forget to check whether your homeownership exemption has been applied correctly.) Finally, if the interest rate on your loan is higher than the going market rate, you might benefit from refinancing.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.