Closing costs, taxes, and first year of mortgage payments

[TaylorTaylor]

Hi all, we are in the process of putting in offers on homes, but there is something I am not understanding when it comes to the first year of mortgage payments. We are in NJ and with our lender we are required to have one year of property taxes as part of our closing costs. I understand that this amount is held in escrow to be paid out four times a year (in NJ property taxes are four times a year). Let's assume that this also applies to our mortgage insurance and homeowner's insurance, does this mean for our first year of mortgage payments we are only paying our principal and interest payments monthly as insurance and taxes are coming from escrow? In other words, our first year of monthly payments will be less than the following years? 

[pizzadude]

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@TaylorTaylor wrote:

Hi all, we are in the process of putting in offers on homes, but there is something I am not understanding when it comes to the first year of mortgage payments. We are in NJ and with our lender we are required to have one year of property taxes as part of our closing costs. I understand that this amount is held in escrow to be paid out four times a year (in NJ property taxes are four times a year). Let's assume that this also applies to our mortgage insurance and homeowner's insurance, does this mean for our first year of mortgage payments we are only paying our principal and interest payments monthly as insurance and taxes are coming from escrow? In other words, our first year of monthly payments will be less than the following years? 

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No, your payments will be the same for year1 as future years.  You'll continue to pay into your escrow account with each monthly payment.  The prepayment due at closing is for the purpose of ensuring that you're covered when your lender pays your annual tax bill, or in your case 4X annual.   Depending on when your close in the calendar year versus when the taxes are paid, there could be a shortfall unless you prepay as you described.

[ShanetheMortgageMan]

In NJ property taxes are usually due on February 1, May 1, August 1, and November 1.  If you have an escrow account then your lender is requiring a certain amount of property taxes to be paid at closing.  The amount due would probably for the November 1st installment (3 months) and part of the February 1st installment (2 months since you'll only have to make a January payment before it's paid out + a 2 month cushion) for a total of 7 months.  The property taxes due on November 1st should cover the period of time of Oct/Nov/Dec, so if you are required to pay November 1st's at closing there should also be a pro-rated property tax credit from the seller for however much time has elapsed between 10/1/2023 and your closing date.

Mortgage insurance you pay monthly and the lender pays the premium directly to the mortgage insurance company.  There are forms of mortgage insurance that would have an upfront cost but those are less common (other than with FHA, which it's mandatory for). 

Homeowner's insurance you pay a full year at closing, that insures you for the first 12 months after you close, and then each month you pay 1/12th of the premium into the escrow account so the lender has enough funds to pay next year's insurance premium when it comes due.  The mortgage company will also collect a couple months of insurance from you at closing so there is a cushion in case you pay late.

Your mortgage payment will always include these portions each month, in addition to the principal & interest payment.  As your property taxes, mortgage insurance, and homeowner's insurance change then those portions of your mortgage payment will also adjust accordingly.

[TaylorTaylor]

Thank you!

[ShanetheMortgageMan]

Anytime.