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Property Taxes

As the old adage says, the only two things that are certain are death and taxes.  When you buy a home, the government will be sticking out their grubby hands asking for a piece.   A large part of the expense of owning a home is paying property taxes.   Property taxes are collected by the county governments to primarily fund schools and other services.   The amount of taxes collected is a direct reflection of the value of the home.

When you are deciding how much to spend on a home, you have to take into account the property taxes.   Property taxes are usually included on the listing sheet for the home you wish to buy.   However, if you are buying a new construction property, the assessed taxes will be delayed, so you must estimate the tax amount.   If the tax bill is unavailable, a good estimate of the annual tax bill is 1.25-1.5% of the value of the home in the city of Chicago.  In some of the suburbs, you may want to assume 1.75%.

For example, if you buy a home for $350,000, the estimated tax bill in Chicago will be approximately $4375 per year or $364.58 per month ($350,000 x 1.25%/12 = $364.58/month).  It is very important that you budget for your property tax expense in your overall monthly payment.

To Escrow or Not to Escrow:

There are two approaches to handling the payment of your property tax bill.   The first and most common is known as “escrowing.”  Escrowing is when you make 1/12th of your annual tax bill payment directly to the mortgage lender.   When the bill comes due, the lender makes the payment on your behalf.   The best way to think of escrowing is like a forced savings program.  The lender prefers that they handle your property tax bill because if for some reason the taxes are not paid on your home, the government can then file a lien against the home.   Remember, the home is what is securing the mortgage the lender is giving you, so they don’t want any potential interference with that security.

Traditionally, if you do not make a 20% down payment lenders will force you to escrow.   However, with the advent of piggyback mortgages, borrowers who do not put 20% down, but instead structure their loan as an 80-15-5, 80-10-10, or 80-20 with a second mortgage have a choice not to escrow.   If you choose “waive escrows,” you are responsible for paying your tax bill in lump sums when it comes due.   So if you buy in Cook County, you will have to make sure you have funds available to pay the bill.   Just because it isn’t being collected monthly, does not mean you don’t have to pay!

There are three advantages to not escrowing, which is why I usually recommend it when the buyer has a choice.

Lowers Closing Costs: The first advantage is that not escrowing lowers your out of pocket costs at closing.   Because the bank has pay the taxes on your behalf, they will have to collect a number of months of taxes from you at closing to ensure they have enough funds available to pay the bill.   The amount collected can range from three to eight months depending on the month you close and when taxes are due.   So in the example above, you might have to come to closing with a prepayment of six months of taxes which would be an additional $2100 or so.

You have control: While banks want to ensure your taxes are paid, they are notorious for poor servicing and many times they screw up borrowers’ escrow accounts.   When I bought my first condo, the County did not divide the tax bill for the individual units and I received a tax bill for the ENTIRE condo building.   Of course, the lender didn’t take thirty seconds to figure out that the tax bill they blindly paid on my behalf made absolutely no sense and left me with a negative escrow account.  The error was corrected, but it took a month to fix and should have never happened in the first place.   I rather be the one writing the check.

Improve monthly cash flow and collect interest: By not escrowing you are improving your monthly cash flow and if you are savvy, you would be investing the funds in an account offering a decent return.   It is not like the bank is going to pay you interest on your money while it sits in their escrow account.

Despite the advantages, some people prefer escrowing as it means it is one less bill you have to think about and it forces you to save.  We all know the American consumer is a big saver… yeah right.  Regardless of which method you choose, you have to pay the piper.  The only saving grace is that your property tax bill is fully deductible on your federal income taxes, so there is a wee bit of sunshine.

For more information on property taxes in Chicago, you can refer to www.cookcountytreasurer.com or www.cookcountyassessor.com

As always, if you have any questions don’t hesitate to give me a call and that’s my two cents.

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