If I have a home mortgage and have only paid off 20% of the principal, then the bank technically "owns" the remaining 80% of the home. So, why isn't the bank required to pay 80% of the property tax every year?
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84What would be the point? If if for some reason the bank was responsible for some % of the tax, do you think they wouldn't just pass it on to you by adding it to your mortgage payment?– brhansCommented Jul 17, 2018 at 18:49
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3The bank probably already rolls the various insurances (homeowners, PMI/MIP) into your payment on top of the actual mortgage amount - this would be no different and has nothing to do with the interest you're paying on the principal you borrowed. But DJClayworth's answer tells you the real story.– brhansCommented Jul 17, 2018 at 19:06
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51This is a fair question. OP is just under a common misunderstanding. Not sure why it is being down voted.– JohnFx ♦Commented Jul 17, 2018 at 21:20
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3As a curiosity for overseas readers, it's perhaps worth noting that in the US experience, in almost all regions, almost all of the property tax goes to pay for the local school system.– FattieCommented Jul 18, 2018 at 19:21
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6The question is based on a completely incorrect premise; it is not in any way true that "the bank technically owns 80% of the house" for a standard mortgage. If your question is about mortgages constructed to get around the prohibition in Islam about paying interest, then state the question more clearly. As it is, this question should be closed as it is based on a faulty premise.– Eric LippertCommented Jul 19, 2018 at 22:30
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3 Answers
You have a misunderstanding of what a mortgage means.
The bank does not own 80% of your home. Instead they have lent you some amount of money, and they have a lien which means they can possess your home if you fail to pay it back. They are not responsible for any costs of your home.
I know people popularly say "the bank owns 80% of my home" but it is not true in any technical or financial sense.
(There are some exceptions for unusual kinds of 'mortgages')
answered Jul 17, 2018 at 18:49
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5+1 | I'd saw this person has a fundamental misunderstanding of ownership.– quidCommented Jul 17, 2018 at 18:55
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113And the bank gets none of the benefits of ownership. If the house goes up in value, the bank gets none of that. The bank doesn't get to use the house at all. Commented Jul 17, 2018 at 19:57
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83Exactly. You wouldn't expect them to come vacuum 80% of the rooms, right?– ceejayozCommented Jul 18, 2018 at 1:18
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1Comments are not for extended discussion; this conversation has been moved to chat. Commented Jul 22, 2018 at 11:47
Slight addendum to the already posted correct answer:
The institution who lent you the money has no reason to pay the property tax on your building. They aren't using water, taking showers, flushing toilets, getting police and fire protection, driving on city streets, etc...
However, they do have a profound interest in ensuring that you pay the property tax.
As explained, if you should default on your payments, the mortgage holder can take the house, sell it, and take what is owed from the proceeds.
EDITED to address comments:
But, if you have run up an unpaid property tax bill before defaulting, the local authority gets first crack at the value in the property to pay the tax bill, ahead of the mortgage company. This in turn reduces the amount available to the mortgage company to satisfy the mortgage in default.
No lender likes to see their available collateral diminish in value, so they will either demand an annual receipt showing taxes paid, or add the property tax to the mortgage payments you are making.
For the same reason, one often needs to supply the mortgage company with proof of adequate fire/flood/tornado/earthquake/whatever insurance...
And if one borrows more money with the property as collateral, the terms first and second mortgage denote not chronological order, but rather the order in which the lenders, upon default, can get their balance owed from the sale (until it runs out).
When I sold my home (Toronto, Canada) I took back a mortgage from the purchaser, that, among other things, allowed me to inspect the mortgaged property (with reasonable notice) to ensure that the property, that I no longer owned, was being maintained so as to preserve its value.
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18+1 for this key statement: "However, they do have a profound interest in ensuring that you pay the property tax."– GWRCommented Jul 18, 2018 at 11:35
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5Down voted. When I had a mortgage, I did not do escrow, and the lender never asked me for a property tax or insurance (for that matter) payment receipt. Also you are technically incorrect that the property taxes are added to mortgage payments. Payments to escrow and payments to the mortgage are two distinct transactions that are covered by one "check".– Pete B.Commented Jul 18, 2018 at 14:07
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11@PeteB. You may not have, but it is very common to (pretty uncommon not to) have an escrow account, even if you might be able to get out of it later. It's almost universally true that lenders will require proof of sufficient insurance. And while it is true that the money is going into two different buckets after the fact if you have an escrow account, it is still coming out of a single payment, and your mandatory monthly bill is just listed as the sum of the two, so while it might technically be two accounts, the payment of both is certainly still a single "transaction".– neminemCommented Jul 18, 2018 at 15:28
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6@neminem All of this is definitely jurisdiction-specific. I am in the process of purchasing a property in the UK, and have no idea what the escrow account being discussed even means. But then, there isn't a direct equivalent of the property tax being discussed either. I think it's a common problem on this site that people assume things are universal because they have only ever lived in a single jurisdiction.– IMSoPCommented Jul 18, 2018 at 17:35
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2I don't want to just willy-nilly edit people's answers, but I would suggest changing the second to last paragraph to something like "No lender likes to take the risk of getting back less than they are owed, so often they will require you pay them and they pay the taxes on your behalf. If they do let you pay it directly, they may charge a higher interest rate for the extra risk; some even demand an annual receipt showing taxes paid."– stanniusCommented Jul 18, 2018 at 17:52
Ditto DJClayworth.
As long as you make your mortgage payments, the bank has zero property rights in your house.
The bank cannot evict you from the house.
People from the bank cannot enter the house without your permission. They certainly cannot just decide to move in one day.
The bank has no say in what furniture you put in the house, what color you paint it, or what sort of trees and flowers you plant.
Etc.
Yes, if you fail to pay the mortgage, the bank can bring legal action against you to force you to pay, including ultimately the right to sell the house to collect what you owe them.
But then, if you take your car to an auto mechanic and then refuse to pay the bill, the mechanic has a similar right to sell your car to pay the bill. Does taking your car to an auto mechanic mean that now the mechanic owns the car? No, not unless you don't pay the bill.
Suppose you buy a toaster with a credit card. Who owns the toaster, you or the credit card company? You do, of course. Even though you haven't paid for it until you pay the credit card bill.
I had surgery a few months ago and the doctor put stents in my heart. I haven't paid most of my share of the bill yet. Does the hospital own my heart? No. (My girlfriend does. :-) )
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6+1 For a good answer, especially the heart ownership comment.– dgnuffCommented Jul 19, 2018 at 20:40
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I think they would have rights if you took actions that reduce the value of the house. Say you have $100,000 worth of fire damage, and the insurance pays. If you are happy to live with the damage and take the $100,000 for the best holiay ever, the bank won't be happy. Commented Jul 21, 2018 at 18:33
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1@gnasher729 Hmm, anything like that would have to be in the mortgage contract. I just glanced through my mortgage and didn't see anything like that. "they wouldn't be happy" and "they would have legal power to force you to do something different" aren't the same thing. My mortgage does require me to have insurance on the property. I didn't check my insurance policy, but I vaguely recall it having a clause about me being required to keep the property in "good repair" or some such.– JayCommented Jul 22, 2018 at 3:40
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@Jay So indeed you vaguely recall the bank having power over the house. Commented Jul 22, 2018 at 6:02
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1They don't have power over the house. You have a contract where they loaned you a lot of money, and you gave them a security that the bank can use to recover their money if you don't pay. The contract will have consequences if the value of the security gets reduced. Commented Jul 22, 2018 at 22:28