Mortgage-escrow users shouldn’t pay taxes directly

Ilyce Glink and Samuel Tamkin

Q: If my tax payment is included in my mortgage payment, can I go to the local tax office and prepay the taxes before the due date so that I can reduce my monthly payment amount?

A: In theory, what you're trying to do is reduce your monthly payment by sending money to your local tax officials. It sounds like a good idea, but it won't work. Worse, you could get into a lot of trouble if you try it.

Here's why: On the day that you pay your tax bill for the year — let's say in the amount of $2,400 — you would also have to notify your lender that you had paid the tax bill.

Here is where it gets interesting. If your lender ignores the payment you've made (which it could do), the lender might send in the tax payment anyway. Now you have a duplicate payment of the tax bill, with the lender saying it was responsible for the payment. You'd have to apply for a refund.

If you simply subtract the amount of the tax bill from your monthly payments, the lender might think that you're behind in what you owe, and you could suddenly be reported as paying late on your credit.

Let's say that instead of ignoring you, the lender doesn't pay the tax bill. So, you've paid the taxes, but the amount of your monthly payment would stay the same. Your monthly mortgage payment will not go down until your lender reevaluates the balance in your tax-escrow account.

Your lender is obligated to review that account once a year and determine whether the balance is accurate or too high or too low.

If the account has too much money, the lender can mail you a check for the overage. If the account has too little money, however, the lender will ask you to deposit more money into the account or bill you an increased escrow amount for the next 12-month period. (By law, the lender is allowed to keep a full year's worth of taxes in your account, plus a small amount extra in case taxes go up.)

Taking a step back, your loan payment is probably made up of the repayment of your loan (interest and principal) and about of your annual property-tax bill and your homeowners-insurance premium (if that is also an escrowed amount).

If you make the tax payment, and the lender reconciles your account shortly thereafter, your loan payment will remain the same because the lender will return the escrow money to you and start the process over of collecting $200 per month for the taxes ( of the $2,400 tax bill). At this point, your prepayment of the taxes has done nothing for you, and your monthly payment will probably stay about the same.

If you are seeking to pay your own taxes when they come due, you should, instead, talk to your lender to figure out whether you are eligible to have the escrow for real estate waived.

If you are, your monthly payment would be lower, and you'd handle the payment of the taxes directly with the government agency.