Congratulations! You’ve found the home of your dreams, budgeted for the monthly payments, and are well on your way to settling into your new investment. You’ve made it to the end of year one and in the mail comes a surprise… not only do you owe your mortgage company a hefty sum, but your monthly mortgage payments for year two have jumped up well above your budget! This is the surprise most first time home buyers will get in year two of home ownership in Central Texas. A good real estate agent can prepare you for these surprises, but your average agent tends to leave this part out.
Let me explain…
When a buyer closes on a home, the seller is required to pay their portion of that year’s property taxes at the closing table. This is a pro-rated amount based on the length of time the seller owned the property in that year.
When the buyer’s mortgage company calculates their monthly payment, a portion of that payment is for the property taxes due at the end of the year. That portion of the monthly payment is put into an escrow account and once the tax bill is issued, the funds in the escrow account are used to pay off the property tax bill.
The issue is that both the pro-rated amount the seller paid at closing and the monthly escrow deposits are typically estimated based on the prior year’s tax amount. In a sales market like ours, it’s safe to say that property values are going to rise each year. This steady increase in property value creates a large difference in estimated tax bills and actual tax bills. The new homeowner is left with a deficit in their escrow account, prompting a request for funds from the mortgage company to pay off the total tax bill. This request from the mortgage company conveniently occurs around Christmas time and must be paid in full by January 31st.
But wait, there’s more…
Because year one’s property taxes were more than originally estimated, year two’s monthly escrow payment has gone up (sometimes substantially), resulting in a higher monthly mortgage payment in year two of ownership.
If you’re a first time home buyer and confused about your property taxes, give us a call. Our firm can help limit the surprises and make sure you are paying the lowest amount of property taxes within the law. Our experienced and knowledgeable consultants can make sure you are set up to pay as little as possible not only this year, but for future years as well.