Impounded vs. Non-Impounded Property Taxes: What You Need to Know
Introduction
Owning a home comes with many responsibilities, and one of the biggest financial obligations is property taxes. If you’re a homeowner, you might have heard the terms impounded and non-impounded property taxes. But what do these terms mean, and how do they affect you?
In this blog, we will break down these concepts in simple words. We will explain the difference between impounded and non-impounded property taxes, their pros and cons, and which option might be best for you.
What Are Property Taxes?
Before we dive into impounded and non-impounded taxes, let’s quickly understand property taxes.
Property taxes are fees that homeowners must pay to their local government based on the value of their property. These taxes help fund public services like schools, roads, police, and fire departments. The amount of property tax you pay depends on the tax rate set by your local government and the assessed value of your home.
Most homeowners pay their property taxes once or twice a year, but how you pay them depends on whether they are impounded or non-impounded.
What Are Impounded Property Taxes?
Impounded property taxes mean that your property tax payments are included in your monthly mortgage payment. Instead of paying your taxes directly to the government, you send the money to your mortgage lender, and they handle the payment for you.
The lender collects an extra amount from you each month and deposits it into an escrow account. When your property tax bill is due, the lender uses the money in the escrow account to pay it.
How It Works:
- Your lender calculates your estimated yearly property taxes.
- They divide this amount by 12 (months in a year).
- Each month, you pay this amount along with your mortgage.
- The lender keeps this money in an escrow account.
- When taxes are due, the lender pays them on your behalf.
Pros of Impounded Property Taxes:
- Easier Budgeting: You don’t have to worry about saving for property taxes separately.
- Avoid Late Fees: Your lender makes sure the taxes are paid on time.
- Less Stress: You don’t have to remember due dates or deal with the tax office.
- Lender Protection: Lenders prefer this option because it ensures property taxes are paid, protecting their investment.
Cons of Impounded Property Taxes:
- Higher Monthly Payments: Your mortgage payment will be larger because it includes taxes.
- Less Control: You don’t directly handle your tax payments.
- Escrow Account Adjustments: If your property tax rate changes, your lender may increase your monthly mortgage payment.
What Are Non-Impounded Property Taxes?
Non-impounded property taxes mean that you are responsible for paying your property taxes directly to the local government. Your mortgage lender is not involved in the process.
How It Works:
- Your local tax office sends you a property tax bill.
- You pay the bill yourself (usually once or twice a year).
- You keep track of due dates and ensure payments are made on time.
Pros of Non-Impounded Property Taxes:
- More Financial Control: You manage your own money and payments.
- Lower Monthly Mortgage Payment: Your mortgage payment is lower because it does not include taxes.
- Potential to Earn Interest: If you save your tax money in a high-yield savings account, you can earn interest before paying the tax bill.
Cons of Non-Impounded Property Taxes:
- Harder to Budget: You need to save money throughout the year to cover the tax bill.
- Risk of Late Payment: If you forget to pay, you might face penalties.
- Large Lump Sum Payments: Instead of smaller monthly payments, you must pay a big amount at once.
Which Option Is Right for You?
Now that you know the difference, how do you decide whether impounded or non-impounded property taxes are better for you? Here are some factors to consider:
- Your Mortgage Lender’s Rules:
- Some lenders require impounded property taxes, especially if you made a small down payment (less than 20%).
- If your lender gives you a choice, then you can decide based on your financial situation.
- Your Financial Habits:
- If you prefer predictable payments and don’t want to worry about tax deadlines, impounded taxes might be better.
- If you are good at saving money and prefer more control over your finances, non-impounded taxes could work well.
- Cash Flow and Budgeting:
- If you don’t want to deal with setting aside a lump sum for taxes, impounded taxes spread the cost evenly across the year.
- If you prefer to save on your own and pay in one go, non-impounded taxes allow you to do that.
- Interest Earnings:
- With non-impounded taxes, you can keep your tax money in a savings account and earn interest before paying the bill.
- With impounded taxes, the money sits in an escrow account, usually without earning interest.
Common Questions About Property Tax Payments
1. Can I switch from impounded to non-impounded property taxes (or vice versa)?
Yes, in many cases, you can switch. However, some lenders may have rules about when and how you can make this change. If you want to switch, contact your lender to find out the process.
2. Do all mortgage lenders require impounded property taxes?
No, not all lenders require them. However, if you made a small down payment (less than 20% of the home’s value), the lender is more likely to require impounded taxes.
3. What happens if my property taxes increase?
If your taxes increase and you have impounded taxes, your lender will adjust your monthly payment to cover the new amount. If you have non-impounded taxes, you will need to pay the higher amount when the tax bill arrives.
4. Is there any benefit to impounded taxes besides convenience?
Yes, lenders often offer slightly better mortgage rates to homeowners who choose impounded taxes because it lowers their risk. It also ensures that your property remains in good standing with the tax authorities.
5. What happens if I miss a property tax payment?
If your taxes are impounded, your lender ensures they are paid on time, so you don’t have to worry. If your taxes are non-impounded and you miss a payment, you may face penalties, late fees, and even a tax lien on your property.
Conclusion
Understanding the difference between impounded and non-impounded property taxes can help you make the best financial decision for your situation.
If you prefer convenience, predictable payments, and less stress, impounded property taxes are a great option. If you prefer financial control, flexibility, and the ability to earn interest on your savings, non-impounded property taxes might be the better choice.
Whichever option you choose, always stay on top of your property taxes to avoid penalties and keep your home secure.
Rana Real Estate Group is a trusted name in real estate, offering expert assistance for all your property needs. Whether you’re buying, selling, or investing, their experienced team provides tailored solutions and personalized service to help you achieve your goals. With a focus on integrity and transparency, they guide you through every step of the process, ensuring a smooth and successful transaction. Whether you’re a beginner or seasoned in real estate, Rana Real Estate Group is here to support you every step of the way.
Rana Khanjani, MBA
Specializing in Commercial, Residential, and Land