Escrow Question for 1st Property

[Marc S.]

Good evening BP, I have an escrow question. 

I will be closing on my first property next week and although I am nervous and freaking out still, I am excited! As I'm sure everyone felt when they closed on their first property, I don't know it all but I'm taking it day by day. 

I plan on speaking with my Mortgage Lender about this question but figured it can't hurt getting some advice.  I was asked during this process if I plan on paying my property taxes all at once at the end at the year or placing the funds into escrow along with my monthly mortgage payment.  So from what I understand I can either the money in my business banking account and pay it when it's due, which in TX you pay after the year or and this is where I'm unsure, I would pay my mortgage and a month's payment of my property taxes, once a month. If for example my property taxes were 5k, it would be $416 a month plus my mortgage, and I would have it on auto pay. 

Please let me know if I'm misinterpreting this or I am correct in my thinking.  

[Randall Alan]

Quote from @Marc S.:

Good evening BP, I have an escrow question. 

I will be closing on my first property next week and although I am nervous and freaking out still, I am excited! As I'm sure everyone felt when they closed on their first property, I don't know it all but I'm taking it day by day. 

I plan on speaking with my Mortgage Lender about this question but figured it can't hurt getting some advice.  I was asked during this process if I plan on paying my property taxes all at once at the end at the year or placing the funds into escrow along with my monthly mortgage payment.  So from what I understand I can either the money in my business banking account and pay it when it's due, which in TX you pay after the year or and this is where I'm unsure, I would pay my mortgage and a month's payment of my property taxes, once a month. If for example my property taxes were 5k, it would be $416 a month plus my mortgage, and I would have it on auto pay. 

Please let me know if I'm misinterpreting this or I am correct in my thinking.  

 @Marc S.

Hi Marc,

We have 37 properties in Florida.  Usually what happens in our state is that at the time of closing, you split the balance of the property taxes with your seller.  Since they are paid in arrears, you will get a credit from the seller for the months he/she owned the property in the current tax year.  In addition, your mortgage company will set up an escrow account for you (presuming you go that way) - but that involves having a certain amount of funds in that account so that you will have enough in reserves to be able to pay the property taxes when they are due.  So the math on that varies by when in the year you close.  But the short answer is that you have to have extra money in the escrow account that will get factored into your closing as well (usually).   I personally find it is easier to have the mortgage company collect your escrows.  One nice advantage of that is that you never know what your next property tax amount will be.  If you are escrowing, your mortgage company will take any shortage you run into and divide it across the next 12 payments (raising your combined mortgage payment, but minimizing the need to come up with the whole amount at the property tax due date). 

Also know that in year 2 your property taxes will likely go from what your seller was paying (say it was based on $200,000 purchase price), to what you paid for the property (say it was $400,000).  So in year 2 your property taxes will likely double in that scenario (give or take).  So be sure to anticipate what your taxes will be based on YOUR purchase price, versus what your seller paid for the property. This can often be a big surprise when you get a bill that says you are thousands short on taxes for your second year!

Outside of possibly earning a little interest on your money, I don't see an advantage to doing your own escrows.  It's a lot easier to let the mortgage company handle it in my personal opinion.  But the advantage of splitting amounts due across 12 months outweighs the interest possibilities to me.

Hope it helps!

Randy