Goodbye, mortgage. Hello, tax bill.
Once the mortgage is paid off, you're directly responsible for property taxes. Here's what to do.
If you have paid off your mortgage -- as we did earlier this year -- you have some new tasks to take over from the bank or mortgage company. One of those is paying the property taxes on your home.
We just received our first tax bill. There are a few rules and procedures to be aware of.
The funds for paying the taxes are collected via the homeowner’s monthly payment. The portion of that payment intended to pay property taxes is deposited into an escrow account. When the taxes become due, the property tax bill is sent directly to the mortgage company. In response, the mortgage company sends a check directly to the tax-collecting authority. This insures that a careless taxpayer won’t neglect to pay the taxes, which would place the mortgage holder at risk.
When the mortgage is paid off, the lender is now out of the loop. As a homeowner, you need to step in and follow some basic procedures to protect your own interests.
Notify the taxing authority. Your first critical step is to notify the local taxing authority that your mortgage has been satisfied and that all future tax bills should be sent to you.
Typically, the taxing authority is at the county level. The responsibility for sending property tax bills can vary from state to state and sometimes is different between counties. The property tax authority may be called the tax assessor’s office or the county clerk’s office. If you are not sure, call the county administrative offices (the county clerk or county executive is a good place to start) and just ask.
When you are connected to the right office, give them the new information over the phone but always follow up with a detailed letter of instruction. Make sure that you use complete identifying information about the property and tax district in your letter.
Make note of the tax payment deadline. When you are speaking to the local taxing authority, ask when the tax bills are mailed and when the property taxes will be due. Then put those dates on your calendar so that you are reminded to check for receipt of that first tax bill.
You don’t want to discover after the fact that your taxes are overdue because the bill was mistakenly sent to the mortgage company. If you use money-management software such as Quicken, schedule the payment in your computer as another reminder.
Check for an early-payment discount and late-payment penalties. Many county tax authorities will send a tax bill that lists several payment deadlines. In some cases, payment by the first deadline will earn you an early-payment discount. For example, the tax bill I received states a due date and a tax “face amount” of $2,074.60. However, if we pay a month earlier, we will owe $2,033.11, a 2% discount. Because it is doubtful that we can earn a guaranteed 2% on that money in 60 days, we will pay our property taxes by the discount deadline.
That same tax bill also states two other deadlines. If we pay a month late, there is a 5% penalty. A further delayed payment will incur a 21% penalty.
Send your tax payment to the correct location. In some cases, the local office where you must send your property tax payment is different from the office that actually assesses the taxes or administers the property tax system. In our case, the payments are supposed to be sent to the county sheriff. So check your tax bill carefully to be certain you are sending your money to the right county office.
Keep a record of your payment. Payment by check is normally sufficient. Be sure to monitor your account for clearance of the check. This will tell you that your tax payment was received and processed. When you file your federal income tax return, use that cancelled check as evidence of payment because your property taxes may be at least partially deductible.
Accumulate the property tax funds for next year. Don’t be caught short at tax time. Because you are no longer making monthly escrow deposits as mandated by your mortgage company, you need to be disciplined in saving for your property tax payment yourself. You could put that money in a separate savings account that you dedicate to homeowners insurance, property taxes, and long-term maintenance projects like a new roof.
Having to pay property taxes yourself all at once is no fun, but it beats the alternative of having a mortgage.
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