Recently I was explaining to a client what costs to expect at closing and some of the decisions that need to be made before that event occurs. Two of the controllable ones are the Prepaid Taxes and Insurance; the control is in the buyer’s hands for method of payment for both and that is the primary purpose of this post. It is also within the buyer’s hands to control the cost and provider of their home owners insurance.
Paying Taxes & Insurance Monthly Is An Option
Many people do not realize that it is not necessary for the property taxes and homeowners insurance to be included in your monthly mortgage payments. In fact, it can be more expensive to do that. Following is much of the text that I sent my clients to inform them of their options and is being provided here as information for my readership. Word of caution – this is true in the Great State of Texas; and although I believe it to be true across the country, I have made no attempt to confirm such so if you are in another state, be sure to verify this with your Realtor.
Insurance – Homeowners Insurance is required on your property during the entire period that it is financed. When you are establishing a new loan (either through a new purchase or are refinancing) you have two options for payment of your home owners insurance:
- You can pay the insurance on an annual basis directly to your Insurance Company (typically prior to closing); or
- Your Mortgage Company can collect the insurance on a monthly basis with your payment.
If you opt for the first one above then the annual payment would be paid directly to your Insurance Agent prior to Closing and you would document to the Lender that the payment had been made prior to Closing. This method will cost you the buyer for twelve (12) months of insurance out-of-pocket prior to closing.
Conversely, if you choose to have the Mortgage Company collect the insurance on a monthly basis as part of your payment then you would bring that amount (typically at least 14 months of insurance payments) to Closing.
Monthly Payments of Insurance Increase Your Cost
Oftentimes the monthly payment option actually increases the annual cost of insurance. This is primarily due to the administrative factor of monthly collections versus only one annual payment. It also increases the Buyers costs at closing as well. When you pay annually the insurance agent will collect 12 months of insurance which is paid directly to the Agency. If you select the monthly option, the Title Company will collect 14 months of insurance at Closing which will be disbursed to the Lender / Mortgage company. The Lender will pay the insurance company for your first year’s policy and retain two months’ insurance payments in your escrow account with them for the following year’s payment.
Property Taxes – The concept is the same as for Insurance but the timeframe will be very different.
As the Buyer you will be responsible for paying Property Taxes to the County in which you live for the entire year of your purchase. This post will assume you purchase during the Calendar Year 2014.
Although you are responsible for the payment to the County as of December 31, the Seller will pay you for the months of Taxes for 2014 that they occupied the property. This payment of taxes to you is called Prorated and is paid to you (the Buyer) at Closing. The exact amount will be determined when an actual Closing Date is set. Just as with Insurance, you have two options to pay Property Taxes to the County:
- You can pay the taxes on an annual basis directly to the County Tax Assessor; or
- Your Lender / Mortgage Company can collect the Taxes on a monthly basis with your payment.
Taxes are typically due to the County at the end of the calendar year but not later than Jan 31st of the following year. Paying the taxes in December allows you to claim that amount on your current year Federal Tax Return. So, if you pay taxes by December 31, 2014 then you could claim those tax payments on your 2014 IRS tax returns.
You Have Choices
Deciding to pay Insurance and Taxes directly to those providers is called ‘outside of escrow’. This keeps your monthly payments to the mortgage company lower but also creates a personal obligation at year-end for you to pay property taxes and annually in whatever month you close for homeowners insurance. For example, if you close in June then your annual insurance payments would be due by June each year at the latest. Choose wisely for your family’s budgetary tendencies.
If your family budget can support setting money aside into a savings account or another account each month for insurance and property taxes then your best option is to pay these two costs directly to the providers (Insurance company and County).
However, if like many families, it’s a challenge to keep those monies in the account for that purpose or unlikely to be successful at setting that money aside, then by all means, have the Lender / Mortgage company escrow these two costs into your mortgage payment and be sure they are paid on time.
Only One Chance
By the way, both are either escrowed with your payment on a monthly basis or both are paid separately outside of escrow; you cannot have one go into your monthly payment to the mortgage company and not the other.
High Risk Insurance
Just as a cautionary note (and I speak from experience) if, at any time, the mortgage company thinks you do not have homeowners insurance on the property they will obtain a high-risk policy for you and charge you big bucks for it. You can get them to reverse those costs and remove the high risk insurance policy but it takes diligence in pursuing it and perseverance to assure the correct policy is in place.
Thus, you can pay the home owners insurance directly to the agency of your choice prior to closing and annually as billed by the insurance company. You can also pay your property taxes annually in December as required. If your family’s budgeting and saving permits this to occur, it is your best option. However, not everyone has the same financial positioning and therefore not everyone can make the annual payments. If your family is in a different position today, make the smart choice and go with the monthly escrow by the Lender / Mortgage company and assure these important aspects are properly maintained.
About this Author
Realtor Brenda (Brenda Patton) is a professional real estate agent in Frisco, Texas, licensed by the State of Texas and specializes in listing properties and is a certified Seller Representative Specialist (SRS). Brenda Patton is a Texas-licensed REALTOR with Ebby Halliday REALTORS located at 1415 Legacy Dr, Suite 100, Frisco, TX 75034. You can reach