February 16, 2015 By Justin McHood
When you are at a mortgage closing, there are numbers being thrown at you from many people. It can be very difficult to determine exactly what you are paying and who you are paying it to. A common question comes up regarding how much money a borrower must pay towards property taxes and insurance at the closing. The answer will differ depending on whether you are going to pay your taxes and insurance through an escrow account or if you are going to be responsible for them on your own. If you choose not to impound your taxes and insurance, your lender will likely charge you an additional 0.25 percent at the closing to make up for the risk of you paying your taxes and insurance on your own, plus you will need to come up with the money to cover the expenses, depending on the month that you are closing.
When are Taxes Paid?
Taxes are typically paid two times a year. In many areas, the due dates are March and September. The taxes that are paid in March covers March through August and the taxes paid in September cover September through February. Since the taxes are paid advance, you will likely only owe a portion of the taxes that have already been paid. The escrow agent will determine the exact amount that you owe by determining the number of days that the seller lived in the home during the current tax period and the number of days that you will live in the home once you take possession before the next tax period.
Figuring out What you Owe
You will owe taxes starting the day that you close on the property. This means that if you close on April 25 th. you will owe taxes from April 25 th through August 30 th. Since the seller has already paid those taxes because they were due in March, you will owe the seller the money for the taxes. The seller will be responsible for the taxes from March 1 st through April 24 th. In order to determine the amount that you owe, the taxes that were due in March are divided into a monthly rate (taking the total and dividing it by 6). A daily average is then figured as well, in order to calculate the remaining 5 days in April that you are responsible for paying.
Setting up Escrow
If you are setting up an escrow account, you will need to set aside reserves in your account. Most lenders require two to three months of reserves in an escrow account if there is sufficient time for mortgage payments to be made in order to cover the next tax period. The amount that is required at your closing will be determined by the time of year that you are closing. If you are closing close to the next due date for taxes, you will need to put a larger amount of money in the account to fund it because there will not be 6 full mortgage payments made before the mortgage company needs to pay the county for your taxes. This is important to keep in mind as you set up your closing, if you are not going to be able to come up with a large portion of the taxes at one time, it is best to close on a house earlier in order to give yourself time to pay the mortgagepayments that will fund your taxes.
Paying Home Owner’s Insurance
Most lenders and home owner’s insurance companies will require you to pay a full year of your home owner’s insurance up front. This is typically not a huge cost, but could require you to bring several hundred to one thousand dollars in extra money to the closing. If you are setting up an escrow account, you will also have to add 2 to 3 months of reserves to your escrow account to make sure that there are enough funds in the count should your rates go up or anything else go wrong that would require the mortgage company to need more money to pay your bill. After the closing, your insurance for the following years will be paid by the mortgage company with 1/12 th of the cost being added to your mortgage payment every month.
Before you close on your loan, it is important to have a full understanding of the tax situation and how much you might owe at the closing. Many borrowers are unpleasantly surprised to find out about the large amount of money that they must bring to the closing in order to ensure that their taxes are paid on time. Talk to your loan officer about the timing of your loan to ensure that you are prepared for the amount of taxes and/or insurance that you must pay.