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Owning a home comes with many more expenses than just your mortgage. Among other things, you’ll need to pay property taxes to your municipality. But just how much do you have to pay, and should you opt to have these payments included on your mortgage payments?
Property taxes are fees that the local municipality collects from homeowners to cover the cost of essential services in your neighbourhood, including police and fire departments, garbage collection, snow plowing, and tending to parks, to name a few.
The property taxes you pay on your home are based on a percentage of your home’s assessed value and the specific tax rate in your area. They are calculated by multiplying the assessed value of your home as determined by the property assessment office in your city by the local tax rate.
You may find that your property taxes fluctuate from one year to the next due to a change in your property value and the local tax rate.
You have two options when it comes to paying your property taxes: either pay them directly to the city or include them with your mortgage payments.
If you choose to pay your property taxes directly to the municipality, you could be paying them quarterly, semi-annually, or annually. Make sure to set aside enough liquid funds to be able to pay these installments when they are due.
If you pay through your mortgage, the property tax payments will be included in your mortgage payments, and your lender will send your property tax payments to the city on your behalf.
If you’re a senior, you can defer your property taxes and save money.
To pay your property taxes through your mortgage, your lender will estimate your yearly property tax payments based on your property taxes from the previous year, your home’s recent assessment, and a certain percentage to cover fluctuations in property assessment and tax increases.
To illustrate, let’s say your annual property taxes are estimated at $3,000 and you pay your mortgage in monthly installments. That means you’d have to pay $250 per month ($3,000 ÷ 12). That extra $250 will be collected on top of your regular monthly mortgage amount.
There are perks and drawbacks to paying your property taxes through your mortgage that you should consider before choosing which route to take.
If you’re a first-time homebuyer or have very little equity in your home, your lender may require that you pay your property taxes through your mortgage. That’s because if you fail to pay your property taxes on your own, your lender may be at risk. In this case, your lender will collect your property taxes along with your monthly mortgage payments and pay the city on your behalf.
Failing to pay your property taxes could result in a lien being placed on the title of your home. A lien is a legal claim against your home. If you were to ever file for bankruptcy, the city could claim your unpaid taxes against your property. This isn’t a good scenario for your lender because the lien would have to be paid off before your mortgage debt.
In this case, the lender may not be able to get their entire investment back. For this reason, they may require that riskier borrowers include their property taxes in their mortgage payments.
Property taxes cannot be avoided when you own real estate. But you may have some control over how you pay them. Weigh the pros and cons of paying your property taxes directly to the city versus allowing your lender to pay them on your behalf before choosing which route to take.
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