Prepaying property taxes is a contended issue amongst financial advisers. A few will tell you that you should never offer the government an interest-free loan when you could be earning that interest yourself. Others will argue in favor of the tax benefits of prepayment. There are a number of questions you need to ask yourself to determine if prepayment of property taxes is a financially sound decision.
Benefits of Prepayment
Prepaying your property taxes is primarily beneficial for tax purposes. Property taxes are deductible on your federal income tax return. If you are itemizing deductions on your return, paying your property taxes in advance may help you reach a level of deductions that will provide for a larger tax return. Many people simply prefer to pay in advance to avoid the sticker shock of being forced to pay at the end of the year.
Property taxes vary by state. Policies regarding prepayment vary by location as well. Contact your county assessor's office. You will need to find out what your tax liability estimate is for the coming year. This number is crucial to your financial planning. The actual dollar amount may change whether you choose to prepay. You should also ask about any discounts your state offers for prepayment. Missouri, for example, allows counties to discount property tax by 5 percent if the taxes are paid in full by March 31. Other states offer online tools that helps property owners calculate their upcoming tax payment.
Many mortgage companies have loan programs that require an escrow account for property taxes. Because property taxes take precedent over mortgage payments in a foreclosure scenario, banks do this to protect themselves. Some banks require an escrow account to hold property taxes and others offer points, or discounts, for borrowers who set up escrow accounts.
Most lenders estimate your property taxes for the coming year and divide by 12. They then add that much money to your mortgage payment each month and hold that money until the end of the year. The lender then pays your property taxes. If they overestimate your taxes, you will receive a refund at the end of the year. This is convenient but does not allow for prepayment.
Few mortgage companies are willing to release you from your property tax agreement once you are enrolled in the program. If you are interested in prepayment, call your lender and ask if there is a way to do away with your property tax escrow account. If the lender is unwilling to do this, you will have to look at refinance options. Carefully weigh your options for refinance. Paying points or increasing your interest rate may negate any benefit you receive from prepaying your taxes.
Things to Consider
You are effectively offering the government an interest-free loan. Calculate what you would earn by setting that money aside in an interest-bearing account before you write a check to the government.
When you prepay your taxes, you are paying an estimated amount. The actual property tax amount may be different. You are responsible for verifying that amount and making sure you paid it correctly. Keep receipts for verification.