How Will a Higher Tax Bill Affect Your Mortgage?

Initial Scenario at Closing

  • Net taxable value: $130,000
  • Total annual tax bill: $2,135.08

Your escrow account and monthly mortgage payment are initially based on this tax amount.

After Property Reassessment

  • New taxable value: $332,000
  • Estimated new tax bill: $3,917 – $4,393

Property taxes are often reassessed after a home is sold, which can significantly increase your tax bill.

Worst Case Scenario

Assuming a new annual tax bill of $4,393, this creates an escrow shortage of approximately $2,260.

Your lender will pay the full tax bill when it is due. However, the escrow analysis typically happens the following year. At that time, you will receive a notice outlining the shortage and your repayment options.

The Impact on Your Monthly Payment

If you do nothing and wait for the lender’s notice:

  1. The $2,260 shortage is spread over 12 months (about $188/month) to repay the previous year’s deficit.
  2. An additional ~$188/month is added to account for the higher ongoing tax bill and prevent another shortage.

Solutions

Option 1: Pre-Pay Into Escrow

Begin contributing extra funds toward your escrow account now. This can reduce or eliminate the future shortage and prevent a sudden increase in your monthly payment.

Option 2: Pay the Shortage as a Lump Sum

Wait for the escrow analysis notice and pay the shortage in full. Then adjust to the new, higher monthly payment.

Option 3: Adjust to the New Payment

Accept the increased mortgage payment that includes both the shortage repayment and the updated tax amount.

Example Payment Breakdown

Without Pre-Paying Escrow

  • Principal & Interest: $1,394.04
  • Insurance: $216.49
  • Taxes: $554.08
  • Total: $2,164.61

With Pre-Paying Escrow

  • Principal & Interest: $1,394.04
  • Insurance: $216.49
  • Taxes: $336.08
  • Total: $1,976.61

Original payment at closing: $1,788.46

Key Takeaway

Property tax increases after purchase can significantly impact your monthly mortgage payment. Planning ahead and understanding your options can help you avoid unexpected financial strain.

Have questions about your escrow or future payments? Contact us to review your situation and build a plan that works for you.