In fact, property tax accounts are one aspect of mortgages that always equally irritates the home owners and home purchasers. In fact, outstanding property taxes often proves to be an unusual lien whereby the municipal authorities are granted legal rights either to attach the property or sell it as a security against the dues. It is amply clear from this that unpaid property taxes put the real estate in a category that is above the status of a first mortgage, making it a risky proposition for the mortgagees too. Therefore, in order to maintain their status on a particular property against which the owner has obtained a first mortgage, lenders often insist that along with the mortgage payment installments the borrowers also pay them a fraction of the projected annual tax for the said asset. If the borrower is making monthly payments for the mortgage, he or she has to pay an addition one twelfth of the estimated property tax to the mortgagee every month. The calculation of this additional amount varies accordingly if the mortgagor is making weekly, bi-weekly or semi-monthly payments to the lender. The lender keeps these additional payments in a separate account and makes the property to the municipality when the amount is due.
In fact, mortgagees at all times highlight the expediency of property tax accounts and egg the debtors to pay their property taxes up-to-date. On the other hand, merging the mortgage and property tax payments into a single imbursement also proves to be beneficial for the borrowers. This procedure enables the borrowers to evade making a single large payment when any part payment towards property taxes is outstanding. However, tax accounts are always an expensive affair and this is true for all things that are convenient.
As mentioned earlier that the property tax accounts are very expensive, they are capable of completely equally wrecking the financial resources of the home owners and home purchasers. Basically, it is essential to pay three types of property taxes and they include making payments for the outstanding amount for the current year's taxes in order to update the tax payments till the end of the year, i.e. December 31. The second type of property tax payment involves making a substantial one time payment, also known as 'initial contribution', to set up a tax account. In this case, it implies that since whole of the current year's tax payments have been made, an advance payment is being made towards the property taxes for the following year. Normally, this payment amount is subtracted from the loan advance. The third type of property tax payment is known as the 'tax component'. Such payments are made by the borrower along with each periodic mortgage imbursement and even this could mean an advance tax payment for the succeeding year.
With a view to maintain their status on a first mortgage, generally the creditors prefer to have sufficient cash available with them to pay the property taxes for the real estate they have loaned against. They are always keen to pay the tax bills as and when they are issued by the municipality. As the municipalities issue tax bills temporarily as well as on a final basis, the lenders are free to make deposits on a tax account for the tax on the specific property in advance for the following six months either on an interim bill or the final bill.
In the instance of retiring a mortgage or repaying the loan in full, the lender deducts the surplus amount pending with him or her in the tax account from the outstanding principal sum. On the other hand, a debit balance or withdrawal amount increases the borrower's outstanding payments to the lender. As the lenders maintain the tax accounts in a credit balance, the surplus amount in the account often proves to be a saving for the debtors while they close or discharge a mortgage.
Although most lenders insist on a tax account to protect their investment, there are many creditors often defer on the matter following requests in this regard by the borrower. This is particularly possible when the lender is certain that the borrower or the mortgagor has a substantial (usually 30 per cent or more) equity or stake on his or her property along with a high credit score. In this instance, the borrower is required to submit a copy of the annual property tax receipt obtained from the municipality. In addition, when the lender does not insist on a tax account at the time of signing the mortgage agreement, he or she reserves the right to implement the tax account in the event of the borrowers failing to pay their property taxes regularly or if any property tax payment is outstanding.
It may be mentioned here that since the mortgagees are in the business to earn a profit, they seldom want to let a financially sound borrower go to another creditor simply because of the property tax account issue. Normally, the mortgage officers posted at the branch offices of an investment firm have the freedom or authority to either relinquish or defer the property tax account requirement while sanctioning a mortgage. Hence, this is an important aspect that all home owners or home buyers shopping for a mortgage should always remember.
On the other hand, there are many mortgagors who feel offended when the lenders ask for a property tax account before sanctioning a mortgage. The argument presented by such borrowers is when a lender can rely on them by lending a substantial amount, why should he or she feel apprehensive about the home owners paying the taxes on their property and insist on such a small payment to be made. In such a situation it is advisable to do what a borrowers deems correct as paying the taxes for one's property is important to almost all home owners. And if a home owner agrees to the property tax account, he or she must ensure that the issue is mentioned in the mortgage contract or in any other supplementary contract.