WHAT IS AN ESCROW ACCOUNT?
The majority of homeowners have an escrow account associated with their mortgage. In these cases, a portion of the monthly payment is reserved for the escrow account which will be used to pay the property taxes at the end of the year.
WHAT DETERMINES HOW MUCH OF MY MONTHLY PAYMENTS GO INTO ESCROW?
Your lender estimates the taxes, which are typically based on the previous year’s data. Sometimes they over-estimate, but more often than not, they under-estimate. If you’ve ever had your monthly payment increase, this is likely the reason.
WHAT’S SPECIAL ABOUT THIS YEAR?
Inflation is out of control & property values are increasing in most markets. Aside from regular folks competing amongst themselves to buy houses, homebuyers are also in fierce competition with investors nationwide that are dumping their cash into real estate as a means to shield themselves from inflation & build wealth. As of this writing, our local San Antonio market is sitting on just 1.2 months of inventory vs the usual 6 months–it’s a HEAVY seller’s market. This means if we quit listing homes today, we would run out of inventory in about 36 days. Locally, we saw an 18% increase in property values from 2020 to 2021, & we’re projecting another 18%+ gain this year.
HOW DOES THAT AFFECT MY MONTHLY MORTGAGE PAYMENT?
Your results may vary as all markets are different & property tax rates differ from county to county and state to state. The best way to explain it is to provide a real example. Take a look at the two images below taken from the Bexar County Appraisal District’s website of one of our Air Force clients’ homes.
As you can see, the appraised value of this property increased from $300,000 to $360,940. The annual tax fee with Homestead Exemption (HS) increased by $769 from $7,345.73 to $8,114.80 or $64.09 per month. The annual taxes without HS increased by $1,562 from $7,690.59 to $9,252.82, or $130.17 month
In this case, our hero is saving a good chunk thanks to the Texas Homestead Exemption we urged him to complete when he purchased his home 2 years ago. If he chooses not to pay an extra $64.09 into escrow each month now, above & beyond his normal payment, he’ll be short $769 next year.
If his escrow account is short at the time taxes are due, the mortgage company will cover the difference & adjust his 2023 monthly payments to catch up on the prior-year debt. In addition to charging him an extra $64.09 per month for the 2022 shortage, the lender will also have to increase his payment by an additional $64.09 to cover the upcoming 2023 taxes. In this case, our hero’s 2023 monthly mortgage payment will increase by $128.18, which is still better than the $260 extra he’d have to pay each month without the Homestead Exemption.
CLOSING COMMENTS
As you can see, property tax increases can have significant impacts on your wallet. It’s best to attack the situation early on in order to avoid a more serious problem down the road. Don’t fall into the trap of regretting your home purchase due to property tax hikes. Landlords pass these expenses to their tenants so you’re not losing anything. In fact, you’re actually winning because you’re leveraging your BAH entitlement to build equity & increase your net worth at government expense. If that last sentence interests you, check out our article The BAH Hack to Wealth.
If you found this article helpful, please consider sharing it. PCS Joes Veteran Home Advocacy Group is a nationwide veteran-owned real estate team dedicated to helping service members & veterans with their real estate goals. It doesn’t matter where you’re at or where you’re going, we’ve got your 6. Visit PCSJoes.org to learn about our PCS Concierge Service & check out the savings calculator to see how much we can save you when selling or buying your next home.
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