The risk of borrowing to pay property taxes

For those who own their own homes and land, one of the largest expenses is simply paying the property taxes. These may come due twice during the year, but they are sometimes just due once, or one payment will be significantly larger than the other. For those who are not paying a mortgage — the property taxes are usually rolled into escrow accounts in a mortgage — this could mean paying thousands out of pocket.

This is exactly what happened to one man, who owed right around $19,000 and had no way to pay that much himself. He then found a lender who would give him the money, and he thought his problems were solved. The lender paid the cost up front so that his real estate was safe.

The catch, though, was that the interest rate was huge, at 18 percent. If he just made the minimum payments for the next 10 years, as the loan was structured, it meant he’d pay around $25,000 in interest on top of the $19,000 that he owed. The interest was higher than the debt itself.

According to the Texas Consumer Credit Commissioner, these types of loans are becoming more and more common. In 2008, there were 12,078 of them, but 2013 saw a jump all the way up to 15,738.

For the lenders, there is little risk, as a foreclosure would mean they got their money back. The risk is all on the homeowners.

It’s very important to know what you have to pay for your real estate and to know all of the legal ramifications of taking out a loan to cover the costs.

Source: Houston Chronicle, “Sandberg: ‘Cooling off’ period would help loan customers — 10-day delay would allow consumers needing to pay property taxes a chance to seek alternatives,” Eric Sandberg, May. 13, 2015