I received a frantic call the other day from a long time customer. I heard the panic in his voice right off the bat. He wanted to meet right away, so I opened up my calendar for him and he rushed over. Turns out he just received his annual tax bill and he significantly underestimated what he was going to owe. He couldn’t understand why his tax bill went up if the estimated market value on his home went down.
After discussing certain changes in his property and improvements he made during the last year, which just happened to be the year in which his particular property was reassessed, he saw how the market value and assessment could be adjusted upward as everyone else was experiencing downward pressures in home values.
He requested to take out money from an account that was set aside for other obligations in order to pay his taxes in the current year and receive the full deduction. He asked if this has ever happened to me; have I ever underestimated my taxes by this much. My response was that I don’t try and estimate what my taxes are. My bank does it for me.
After closing on my home a few years ago, it was suggested that I open an account called an Escrow Savings Account.
This type of account is an arrangement where a trusted party, in this case my bank, receives deposits coupled with my mortgage payment every month. For example, let’s say my annual tax bill came to $4,000, this would mean I would have to put away about $333 per month ($4,000 divided by 12), every month, for an entire year in order to have enough in savings to pay my tax bill.
This is exactly what an Escrow account does for you. Let’s imagine a mortgage payment of $1,000 due per month. Continuing with the example above in which the tax bill is $4,000, the borrower would now pay $1,333.00 per month, with $1,000 going to principal and interest and then the remaining $333.00 is placed in an Escrow Savings Account, usually earning interest on the balance as it accumulates.
There are 12 deposits each year, one for every month and there are two distributions made out of this account each year for me; one is my tax bill and my home owner’s insurance bill.
On top of making all the payments for me, my bank will now estimate next year’s taxes (much more accurately than I could); the tax bill and home owner’s insurance invoice is sent directly to them, so I don’t have to sift through the mail wondering if I mistakenly threw it out; and they automatically distribute the funds out, document and record it for me.
The client decided to look into it a bit further. It didn’t take him long, I received a call an hour later to get paperwork ready so he could open a new Escrow Savings Account.
Although not very publicized, it’s common for financial institutions to have this type of account available for their customers. For me, it is an excellent tool to ensure cash flow for certain reoccurring expenses that come up only a couple times a year. If you escrow, do you find it useful? If you don’t, are your estimations fairly accurate, and how do you make sure the funds are there for your property tax payment if you underestimate?