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Impound fees with Mortgage & Property Tax Deduction

save on property taxesYou say to your friend, “Friend, let’s go out tonight.”

“I can’t,” Friend says.  “My property tax bill came (website).  I have to save all my money.”

For the next month, Friend eats only ramen noodles.  Before long, Friend starts looking a little ripe from not doing laundry.  “Have to save money to pay the tax bill!” Friend says.  After 30 days, Friend stumbles into work “I paid the tax bill!  I had to donate bone marrow for money to come up with the rest of the bill but it’s paid!”

Don’t be like Friend.

When buying that duplex, condo or other investment property, the lender may ask you if you want your property taxes, insurance, etc. impounded as part of your mortgage payment.  What exactly does this mean?

By “impounding”, the lender adds a dollar amount to every mortgage payment for taxes and insurance.  This extra money is stored in an escrow account.  Once the taxes and insurance come due, the lender pays them.

Example:  Your purchased a property and your monthly mortgage payment is $1000.  Property taxes are $2,400 per year, that becomes $200 per month.  The insurance, which is $480 per year, is now $40 per  month. Instead of paying $1000 per month to your lender, your new monthly payment would be:

Mortgage $1000
Taxes $200
Insurance $40

Total $1240

Unlike your friend, who has to go on a ramen noodle diet and forsake doing laundry to pay his property tax bill, your bill is paid.

Caveats

Some states require that taxes and insurance are impounded.  If the state laws don’t specifically state, the lender may require impounding these fees if the Loan to Value (LTV) is greater than 90%.  Impound fees may be required if the residence is non-owner occupied (ie rental property).  Some lenders may even offer 1/4 of a point reduction if you agree to have your fees impounded.

You should ask your lender.

Summary

If your state doesn’t require impounding, then the decision rests with you.  Here are some things to think about when making the decision.

Pros:

  • Property Taxes and Insurance will always be paid.
  • Two less bills will clutter your desk.
  • Ramen Noodle Diet is optional, not mandatory.

Cons:

  • You can’t be a control freak.  Some people like to control everything; paying the property taxes certainly qualifies.
  • Some people argue that giving up that $200 per month means you can’t put it into an interest bearing account.  You would be tossing away $10 in interest every six months.
  • Your monthly payment will be higher.  But you planned for that, right?


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