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A budget mortgage is a type of mortgage arrangement that covers the payment of more than simply the mortgage principal and applicable interest. With this type of arrangement, the budget mortgage payment also takes into account any taxes and insurance that are associated with the property purchased using the funds from the mortgage, effectively offering the homeowner a way to manage homeowner expenses with relative ease. This type of mortgage plan is common in a number of countries and is often available with very competitive interest rates and associated fees.
One of the main benefits of a budget mortgage is the ability to managing property taxes and home insurance costs incrementally, rather than having to keep up with due dates and deliver lump sum amounts by those dates. Depending on where the property is located, the property taxes alone can be significant. By using a budget mortgage, a portion of those taxes is bundled into the monthly mortgage payment, making it possible to manage the obligation with less difficulty. In most jurisdictions, the mortgage lender either forwards those incremental payments to the assessor or probate office that is responsible for calculating and collecting the property taxes, or accumulates the funds into a lump sum and tenders the tax payment at the appropriate time of year on behalf of the homeowner.
The same general approach is used when paying home insurance costs by way of a budget mortgage plan. Since the monthly premium for the insurance is bundled into the mortgage payment rendered by the homeowner every month, the lender forwards that portion of the payment to the insurance provider. This eliminates the need for the homeowner to keep up with making a separate payment and helps to prevent any type of temporary lapse in homeowner insurance coverage.
While there are benefits to a budget mortgage arrangement, there are also a couple of potential liabilities that homeowners should consider. The bundling of the home insurance means that the owner has little to no input into which insurer provides the coverage. In some cases, the owner may be able to pay significantly less for the same level of coverage by locating and purchasing insurance from a provider independent of the lender’s offerings. In like manner, the homeowner may find it more advantageous to simply set aside money for property taxes into an interest bearing account and send the payment directly to the tax assessor at the right time of the year. This approach makes it possible to eliminate the budget mortgage fees assessed for offering these services and to even make a little money in the form of interest earned while the money is in savings.