Taxes at Closing and Escrow (Howe: 2013, insurance, mortgage)

[d2mini]

Closing this week and just trying to understand one thing.
Why am i required to pay 5 months of taxes upfront at closing if i'm paying them into my escrow account every month as part of the total monthly mortgage payment? Seems like I'm paying extra the first year?

Can someone explain that to me? Thanks!

[City Love]

It's a cushion that your lender requires.

[HoustonRonnie]

So the mortgage company can collect interest on your "deposit".

[d2mini]

But is that EXTRA tax that I'm paying in the form of a fee, or is it credited at some point?
Will my escrow payment be higher next year due to a higher monthly tax payment since I won't be paying 5 months up front?

[Johnhw2]

Originally Posted by d2mini

But is that EXTRA tax that I'm paying in the form of a fee, or is it credited at some point?
Will my escrow payment be higher next year due to a higher monthly tax payment since I won't be paying 5 months up front?

It is not a fee, the way taxes work is they are past due each year after Feb 1. So they will be paid in January out of your escrow funds. Since you close essentially March 1, by paying 5 months now, you will have around 15 months worth in escrow by next January when 2013 taxes are due. This cushion in the fund makes sure if taxes are go up(they rarely go down) there is sufficent funds for the annual tax payment. You will get a credit for the excess funds in escrow when and if you sell the house.

The alternative is to pay your taxes without escrow, but requires a lot of fiscal discipline and lenders generally allow it if you put a huge amount down on the home. Not one I could recommend for most buyers. Interest rates are so low to day that any lost interest on funds in escrow is small.

[d2mini]

ok, thanks.
I thought about not putting them in escrow (we are putting down more than half) but with savings interest as low as it is, i figure it's not worth the hassle.

[alamakota]

Basically, it is a cushion that the mortgage company requires. Don't worry, the $$ in the escrow will not be lost. In case you decide next year to close the escrow account and pay the mortgage, insurance, and taxes on your own, whatever is left over in the escrow will be returned to you. I closed in December and decided to escrow my property taxes & insurance. However, after one year I will be closing down the escrow account and handling taxes & insurance on my own and I did confirm with my mortgage company that any left over balance from the escrow will be returned to me.