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I just wrote a big ole fat check to pay my second installment of Cook County property taxes so I thought it would be an opportune time to shed some light on property taxes.  Property taxes are just a fact of life when it comes to owning a home.  As such, lenders consider the annual cost of property taxes when approving you for a mortgage.

Here in Chicago, property taxes tend to run about 1.25-1.5% of the value of the home.  However, they can be as high as two percent in some of the suburban communities.  For example, a $400,000 condo in Chicago will typically have annual property taxes of about $5000.  Property taxes is primarily how schools are funded.

Escrowing

In most cases, homeowners escrow their property taxes.  This means the lender collects 1/12th of the annual tax bill along with your mortgage payment and pays the taxes when they are due.  In Chicago, taxes are due in September and March.  However, the September bill is almost always late which is why it was not due until November 3rd this year.  Twice per year, the lender will disburse the money that has been collected in your escrow account and pay the bill on your behalf.  Lenders prefer that borrowers escrow property taxes because it lowers the risk that you will not pay the bill.  As such, unless you are putting 20% down, the vast majority of lenders will force you to escrow your property taxes.

Prepaid Taxes

When you are escrowing taxes, lenders will collect anywhere from 3 to 8 months of property taxes from you at closing.   This money is used to fund the escrow account to ensure you have enough money available to pay the first tax bill after you move in.   The amount collected depends upon when taxes are due relative to your closing date.  The following shows how many months of taxes are collected as part of closing costs when escrowing taxes for purchases and refinances in Cook County

Closing Month/# of Months Taxes Collected

January / 8

February / 3

March / 4

April / 5

May / 6

June / 7

July / 8

August / 3

September / 4

October / 5

November / 6

December / 7

Waiving Escrows

When you put 20% down on a home purchase or take out a purchase money second mortgage (80/10/10) you will have the option of waiving escrows.  Basically, the lender lets you pay your taxes on your own.  This means the bank will not collect tax payments with each mortgage payment and nothing will be collected at closing to fund an escrow account.

Many borrowers prefer not to escrow because banks do not pay interest on the money held in escrow.  In addition, it is one less thing the big banks can screw up!

Be aware though that choosing to waive escrows is not free in most cases.  Most banks charge a risk premium of about .25%  to waive the escrow account which ultimatley gets reflected in your interest rate (will usually result in final interest rate of .125% higher).   When comparing two mortgage loans, it is good to know if one is requiring escrows and the other is not to ensure it is an apples to apples comparison.

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