Your Mortgage Escrow Account

If you have a mortgage on your property, chances are you’re also paying your Real Estate Taxes through an escrow account. An escrow account is a legal arrangement with a third party where money is deposited to satisfy a contract. Basically, your property tax escrow account serves as a middleman between you and the township, collecting tax payments from you each month in your mortgage payment, and then paying the property taxes when they are due.

Escrow accounts are a popular and sometimes mandatory way to ensure that property taxes are paid. An escrow account avoids the need to pay a large amount of money when property taxes are due, because the payment is made up of monthly contributions which are part of your mortgage payment.

You can think of it as a “forced savings account.” When you pay your mortgage bill, hundreds of dollars per month are added to your payment –not for interest or principle, but to pay your annual or semi-annual property taxes, insurance, and other bills (mortgage insurance, for example).

The biggest advantage of an escrow account is for your cashflow. For most people, it’s much easier to pay, for example, $200 per month instead of paying $2,400 once a year. Also, you have the comfort of knowing someone else is responsible for making your insurance and tax payments on-time. You don’t have to remember payment dates or amounts to pay.
But there are some disadvantages: most escrow accounts don’t earn you interest. But for most people, the convenience of an escrow account is worth it.

How Does A Tax Reduction Affect Your Escrow? The good news is, if you get a property tax reduction, your monthly payment should be lowered. ZapMyTax will notify you if we win you a reduction, but the actual amount of the reduction won’t be known until your Town publishes the tax rolls for the year. There are basically three scenarios that can happen:

1. Reduction Granted before Tax Bills Printed
In this scenario, the Town changes your tax bill so your escrow company pays the new, lower rates for both the first and second half payments. You will have a surplus in your escrow account after the first half payment (because you had been making payments to cover your higher tax rate), so your lending institution should revise your payment schedule to balance out your payments for the rest of the year.

2. Reduction Granted after Tax Year Begins
Sometimes a reduction is granted after the first half tax payment is already paid by your lending institution (usually due to a lengthy but successful appeal). Your Town should correct your second half taxes to reflect the first half overpayment, so your second half payment should be less than the first half payment.

If the Town does not correct your second half taxes, a refund based on your total overpayment will be issued.
Your lending institution should revise your payment schedule to balance out your payments for the rest of the year.

3. Reduction Granted after Tax Year Paid in Full
Occasionally, the appeal process gets very extended, to the point where your taxes for the full year are paid before a positive decision is rendered. If this happens, a refund will be issued based on your total overpayment, and your tax bill will be corrected in the next year.
Your lending institution should revise your payment schedule to balance out your payments for the next year.

The best thing to do when you learn the actual value of your property tax reduction (or, actually, what your new tax property taxes are) is to call your lending institution and ask for an escrow analysis.
If you have any questions about this process, please feel free to call our office at (631) 889-5500 and we’ll be happy to help you!