Escrow and Property Tax: How Your Escrow Account Handles Tax Payments

The escrow account is an integral part of the mortgage process. When you take out a mortgage loan to buy a home, your lender will likely require you to set up an escrow account to pay for property taxes and homeowners insurance. 

But how exactly does this work? Does the escrow company really pay your property taxes for you?

Yes, escrow does pay property tax. In a mortgage arrangement, the lender collects additional funds beyond the principal and interest as part of your monthly payment. These funds are deposited into an escrow account and used to pay your annual property tax bill directly to the local government when it comes due.

Let’s take a closer look at what an escrow account is, why lenders require them, and how they are used to pay property tax bills.

How Does an Escrow Account Work?

An escrow account is a special account managed by your lender or mortgage servicer. As part of your monthly mortgage payment, the lender collects an additional amount beyond just the principal and interest. This extra money goes into the escrow account on your behalf.

The lender calculates how much you need to pay towards property taxes and insurance premiums each month. These escrow payments are then collected monthly along with your regular mortgage payment. 

When your property taxes or insurance bills come due, the lender will pay them directly using the funds from your escrow account. This ensures these big bills are paid on time each year.

Why Do Lenders Use Escrow Accounts?

Lenders utilize escrow accounts to protect their investment in your home. If your property taxes or insurance go unpaid, the lender’s interest in your home could be jeopardized. The escrow account ensures timely payment of these essential bills.

Escrow accounts also provide convenience to the homeowner. Having your lender manage the payments means you don’t have to worry about budgeting for large, once-a-year bills. The amount you pay towards escrow each month stays the same, making your housing costs more predictable.

How Does Escrow Pay for Property Taxes?

Your lender will estimate your annual property tax bill and insurance premiums. They will take that total amount and divide it by 12 to calculate your monthly escrow payment. 

For example, if your yearly property taxes are $3,600 and your insurance costs $1,200, the total is $4,800. Divided by 12, your escrow payment would be $400 per month.

Each month, this $400 goes into your escrow account. When the property tax bill comes due, the lender will pay the $3,600 directly to your local government from the escrow funds. This continues year after year to ensure your property taxes are always paid on time.

What Are the Benefits of Using an Escrow Account to Pay Property Taxes?

Utilizing an escrow account to pay property taxes offers several key benefits:

• Convenience – You don’t have to worry about budgeting for or paying one large tax bill each year.
• Avoid Penalties – Your taxes will always be paid on time, avoiding any late fees or penalties. 
• Peace of Mind – You know your property tax responsibilities are being handled by your lender.
• Predictability – Your total monthly housing payment remains the same each month.
• Interest Savings – Your money can earn a small amount of interest while held in escrow, offsetting your total costs.

What Are the Drawbacks of Using an Escrow Account to Pay Property Taxes?

While escrow accounts offer significant advantages, there are a few potential downsides to consider as well:

• Higher Monthly Payments – Your mortgage payment will be higher to account for money set aside in escrow.
• Changes in Tax Bills – If your property taxes change, your escrow payment may need to be adjusted.
• Overage or Shortage – Estimating your exact tax bill is difficult, which could leave you with a surplus or shortage in your account.
• No Control – You rely completely on your lender to make timely payments.
• Escrow Fees – Some lenders charge annual fees for administering your escrow account.

Can You Opt Out of an Escrow Account for Property Tax Payments?

Some mortgage lenders will let you opt out of having an escrow account if you meet certain requirements. This usually requires paying at least 20% down at closing and demonstrating that you have the financial means to pay your taxes and insurance directly.

You’ll have to submit a written request to your lender and get their approval. If your mortgage contract requires an escrow account, you usually can’t opt out until after one to five years of on-time payments.

How Can You Manage Your Mortgage and Property Tax Payments Without an Escrow Account?

If you opt out of having an escrow account, you take full responsibility for making property tax and insurance payments yourself. Here are some tips:

• Carefully budget to have funds ready when bills are due. 
• Set up automatic payments or speak to your county about a payment plan.
• Save money in a separate account just for property taxes and insurance. 
• Mark your calendar with reminder dates for when bills are due.
• Shop around for competitive insurance rates annually.
• Monitor changes to your property’s assessed value that could impact your tax bill.

What Happens If There’s a Shortage or Surplus in Your Escrow Account?

It’s difficult for lenders to predict your exact property tax and insurance bills. As a result, you may end up with an escrow account shortage or surplus at some point.

If there is a shortage, your lender will increase your monthly escrow payment to make up the difference over 12 months. In the case of a surplus, your monthly payment can be lowered.

Significant shortages or surpluses may require the lender to make an immediate adjustment. It’s important to review your annual escrow statement and address any issues promptly.

What Should You Do If You Disagree with Your Lender’s Calculation of Your Property Tax Payment?

If you believe the lender has made a mistake in estimating your property taxes, you have the right to challenge it. Follow these steps:

• Review your escrow account statement carefully for errors.
• Contact your lender and tax assessor’s office if you find discrepancies. 
• Request detailed information on how the amount was calculated.
• Have proof of your actual property tax amount ready to provide.
• Submit a formal dispute in writing if the issue remains unresolved.
• Contact housing counselors for help negotiating with your lender if needed.

Conclusion

In most mortgage arrangements, an escrow account will be used to pay your property tax bill each year. This convenient process ensures your taxes are paid on time while giving you predictable housing payments. However, make sure to verify your lender’s escrow calculations and account for any shortages or surpluses. With a thorough understanding of how escrow accounts work, you can rest assured your essential housing costs will be covered.

Frequently Asked Questions(FAQ)