Are Property Taxes Included in the Mortgage?

Property taxes are typically included in the mortgage payment. The lender collects a portion of the estimated annual property tax amount each month and deposits it into an escrow account. When the property tax bill is due, the lender pays it directly from this account, ensuring timely payment and preventing penalties for the homeowner.

How Are Property Taxes and Mortgages Related?

For many homeowners, property taxes are directly tied to their mortgage. Often, the lender requires the borrower to make monthly payments into an escrow account to cover the annual property tax bill.

This ensures that money is set aside each month so that property taxes can be paid on time when they come due. It prevents the borrower from having to come up with a large lump sum payment each year.

Not all lenders require escrow accounts, but they are very common, especially for borrowers who make a smaller down payment. VA and FHA loans always require escrow accounts.

What Are Property Taxes?

Property taxes are taxes levied on real estate owners based on the appraised value of their property. They are paid to local and state governments to help fund services like public schools, police, infrastructure repairs, and more.

The amount of property taxes owed is determined annually based on the property’s assessed value, which is usually determined by the local tax assessor’s office. The assessed value is typically lower than the property’s actual fair market value. The local tax rate, expressed as a percentage of the assessed value, is then applied to determine the tax amount. Rates vary significantly across the country.

Property taxes are usually paid on a semi-annual, annual, or bi-annual basis. The payment periods and deadlines are determined by local governments. Failing to pay property taxes can result in penalties, interest charges, and even property seizure.

How Are Property Taxes Calculated? 

Another detail that can especially be interesting for future home buyers is how property taxes are calculated and what affects the final cost they’ll be paying.

The first thing to know is that property taxes are not fixed costs; they are actually determined by the city and the assessed value of your property. Home value assessment is done by a professional assessor. This means that the taxes to be paid will be calculated separately for each request.

There are a few factors that professional assessors consider when determining the amount of property taxes, such as: 

• The actual size of the land that the property takes up, 
• The size of the home – square footage of the property,
• Whether it is a corner lot, 
• How old the house is, 
• What amenities are in the area, like schools, bus stations, grocery stores, and similar. 

How Much Will You Pay on Property Taxes?

Talking about effective property tax rates and percentages won’t give you the proper picture of how much money you’ll be actually paying.

Here is a short report on how much money every homeowner should set aside on a yearly basis to cover the cost of property taxes in the states with the lowest property tax rate. 

As expected, the effective property rate will differ depending on the place you choose to live in. Here is how the property taxes look in states with the highest property rate taxes in the US. 

What Is an Escrow Account?

An escrow account, sometimes called an impound or trust account, is a special account that a lender maintains on behalf of the borrower. It is used to pay certain recurring homeownership expenses like property taxes and homeowner’s insurance premiums.

As part of the monthly mortgage payment, the lender collects 1/12 of the estimated annual amounts needed for taxes and insurance. This money goes into the escrow account and accumulates over the year.

When property taxes or insurance bills come due, the lender withdraws the needed amount from the escrow account to make the payment. This ensures bills are paid on time.

How Does an Escrow Account Work for Property Taxes and Insurance?

Here is a simple example of how an escrow account works:

• Tom takes out a $200,000 mortgage with lender ABC Corp.
• His annual property taxes are estimated to be $3,600. His homeowner’s insurance premium is $1,200 per year.
• ABC Corp will collect $300 each month for taxes ($3,600 / 12 months) and $100 for insurance ($1,200 / 12 months).
• These amounts go into Tom’s escrow account. After one year, there is $3,600 set aside for taxes and $1,200 for insurance.
• When Tom’s property tax and insurance bills come due, ABC Corp pays them directly from the escrow account funds.

This system ensures Tom’s important homeownership bills are paid on time. It also avoids needing to pay the full amount at once.

Benefits of Including Property Taxes in Your Mortgage Payment

There are several benefits to having your property taxes included with your monthly mortgage payment:

• Convenience – By paying 1/12 each month, you avoid having to budget for lump sum tax payments.
• Avoid penalties – The lender pays the taxes on time from the escrow account, preventing any late fees.
• Easier budgeting – Including taxes in the payment allows you to better plan for a fixed monthly housing cost.
• Lower interest rate – Some lenders offer a lower rate when you agree to escrow taxes and insurance.
• Forced savings – The escrow system functions like a savings account to cover the bills when due.

Drawbacks of Including Property Taxes in Your Mortgage Payment

While escrowing taxes has its benefits, there are also some potential drawbacks:

• Higher monthly payment – Escrowing for taxes increases your total monthly mortgage costs.
• Shortfalls – If your tax or insurance bills increase, you may face a shortfall in your escrow account and have to pay more each month.
• No control – You rely on the lender to make timely payments instead of managing them yourself.
• No interest earned – Funds in an escrow account do not earn interest like they would in your own bank account.
• Escrow overages – If your escrow account ends up with excess funds, you may have to wait to get the money back.

How to Determine If Your Mortgage Includes Property Taxes

To find out if your mortgage payment includes your property taxes, you can:

• Check your mortgage statement – It should itemize principal, interest, taxes and insurance. Taxes and insurance set asides go into escrow.
• Review your Loan Estimate – This form lists total estimated monthly payments including escrow payments.
• Ask your lender – The servicer can confirm if your loan requires escrow for taxesand insurance.
• Check your closing documents – Escrowing taxes is agreed to at closing via the signing of escrow-related disclosures.
• Try an escrow calculator – Input your home value, tax rate and insurance cost to estimate escrow amounts.

What Happens If You Don’t Pay Your Property Taxes?

Failing to pay property taxes can result in serious consequences:

• Penalties and fees – Late tax payments incur penalties and interest charges that quickly compound.
• Tax lien – The local government can place a lien on your home for unpaid taxes, which must be settled before you can sell.
• Foreclosure – If your lender is forced to pay your taxes from escrow, they may foreclose on your home.
• Property auction – After a few years of delinquent taxes, the local government can auction your home to recover the unpaid taxes.
• Eviction – The new owner resulting from a tax sale auction can legally evict you from the property.
• Credit damage – Missed tax payments are reported to credit bureaus and can badly hurt your credit score.

Can You Pay Your Own Property Taxes If They’re Included in the Mortgage?

If your lender requires escrow for taxes, you typically cannot opt out and pay them independently. However, in some cases, you may be able to remove taxes from your escrow requirement if:

• You have sufficient equity in the home (usually at least 20-30%)
• You have a solid payment history with on-time mortgage payments
• Your loan balance is below a certain amount (for example $250,000)
• You agree to take on tax payment obligations and associated risks

To request escrow removal, you would need to contact your lender and fill out a formal application. They will review your account before deciding whether to approve the request.

Understanding How Lenders Use Escrow Accounts for Property Tax Payments

Lenders require escrow accounts for property taxes and insurance to protect their financial interest in the home against borrower default. By escrowing these bills:

• The lender ensures timely payment and avoids late fees or underpayment penalties.
• If the borrower stops paying entirely, the lender can make the next tax payment from escrow funds and foreclose if needed.
• Holding funds lowers the lender’s financial risk on the mortgage loan.
• Escrowing eliminates “payment shock” when large annual bills come due.

While escrow provides protections for the lender, it also helps the borrower by spreading out costs evenly and preventing missed payments. Overall, it provides security to both parties on the mortgage.

Should You Include Your Property Taxes in Your Mortgage Payments?

Whether or not to escrow is typically the lender’s decision, but you can weigh the pros and cons when given a choice:

Pros

• Forced savings makes it easier to pay large bills
• Avoid penalties from missed tax and insurance payments
• Predictable total monthly housing cost
• Potential lower interest rate

Cons

• Higher monthly mortgage payment amount
• Loss of control over making payments yourself
• Funds don’t earn interest while in escrow account

Overall, escrowing property taxes simplifies homeownership responsibilities for borrowers. Just be aware it increases your total monthly costs. Be sure to budget accordingly.

Conclusion

For most mortgage borrowers, property taxes are included in the monthly payment to the lender and deposited into an escrow account. This allows the lender to pay the annual tax bill directly when due. Failing to pay taxes can result in fines or even foreclosure. While escrowing has some drawbacks, the benefits of convenience and avoiding penalties make it worthwhile for most homeowners. Check with your lender to understand how your property taxes are being handled.

Frequently Asked Questions(FAQ)