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Property taxes may be included in your monthly mortgage payment if your lender requires it as part of your mortgage agreement. This arrangement can be a convenient option to pay down your property taxes each month rather than saving to pay them annually or semi-annually. Here's what you need to know about how and when property taxes are included in your mortgage.
Understanding Mortgage Payments
Mortgage payments often consist of four parts: principal, interest, taxes and insurance. Collectively known as PITI, the sum total of these components make up most or all of your monthly mortgage payment:
- Principal: This is the portion of your payment that pays down your principal balance.
- Interest: Your lender adds variable or fixed-rate interest charges to the principal balance as the cost of borrowing.
- Taxes: If your mortgage agreement doesn't include property tax payments, you'll pay them directly to your local government. Generally, however, mortgage lenders estimate your annual tax obligation, divide it into equal monthly payments and add it to your mortgage payment.
- Insurance: Your lender likely requires you to carry homeowners insurance to protect their financial interests against theft, catastrophic events and other losses. You also might be required to carry mortgage insurance, depending on your loan type and down payment amount. These costs may be included in your monthly mortgage payment.
Though not a requirement with all loans, the taxes and interest charges tacked on to your mortgage payments are collected and managed through an escrow account and paid out when they come due. If the balance of your escrow account has a deficit, your mortgage loan servicer will typically adjust your monthly payment (or send you a check in the case of a surplus).
What Is a Mortgage Escrow Account?
When your mortgage is originated, your mortgage servicer usually sets up a mortgage escrow account to cover your property taxes and insurance. Escrow accounts operate like a savings account and are funded by adding escrow payments to your monthly mortgage payment.
Example: If your property taxes and insurance premiums total $3,000 annually, your lender will divide this amount into 12 monthly escrow payments of $250 that you'll include with your mortgage payments. Your servicer deposits these funds into the escrow account and uses them to pay for your taxes and insurance premiums.
It's easy to confuse your mortgage escrow account with the escrow account you used when you closed on your home. While both serve as savings accounts to fund necessary expenses, they serve different purposes. The mortgage escrow account is ongoing and ensures that your property taxes and insurance get paid on time. By contrast, the closing escrow account is temporary and only used during the homebuying process. These funds are used to pay for the home purchase itself.
Do I Have to Pay Property Taxes With My Mortgage?
Whether or not you pay property taxes as part of your mortgage payment depends on the terms of your mortgage contract.
If Your Mortgage Includes Property Taxes
In this case, your lender will use the funds from your escrow account to pay your property tax bill by its due date. Generally, your lender explains this arrangement before you sign for the loan, and details about whether property taxes are included in your mortgage payments should be outlined in your loan documents.
You should also receive an initial escrow disclosure statement that breaks down the monthly payments and how they are used to cover your property taxes and insurance.
If Your Mortgage Doesn't Include Property Taxes
You may not have to include property tax payments in your mortgage payment if your lender doesn't require an escrow account or you request to waive the escrow requirement. For example, a lender may allow you to forgo an escrow account on a conventional loan if you make a down payment of at least 20% or have significant equity in the home.
If your mortgage doesn't include an escrow account or is paid off, you'll pay your property taxes and insurance premiums directly to your local government and insurance company, respectively.
Pros and Cons of Paying Property Taxes With a Mortgage
Adding a little extra to your monthly mortgage payments makes it easy to pay your property taxes. On the other hand, you may prefer to handle those payments yourself to have more control over your finances.
Benefits of Including Property Taxes in Your Mortgage
- It's convenient. There's little need to remember your tax due dates. Make your full monthly mortgage payments, and the rest is done automatically. You can rest assured your property taxes will be paid on time, and you won't suffer any consequences of unpaid taxes, such as a potential tax lien on your property.
- It simplifies budgeting. Paying through your escrow account makes budgeting for taxes predictable. You won't have to worry about getting large tax and insurance bills every six or 12 months.
- It handles shortages. It's not uncommon for your homeowners insurance premiums to rise or for a new assessment to increase your property taxes. If your escrow account is underfunded because your property taxes went up, your mortgage services will likely cover the entire bill, so you're not late on your taxes. However, they'll raise your monthly mortgage payment to make up for the shortfall.
Drawbacks of Including Property Taxes in Your Mortgage
- It raises your monthly payments. Adding property taxes and insurance to your mortgage leaves you with higher monthly payments. This increase can make it harder to manage other expenses and leave you with less money to cover unexpected expenses.
- It may require a substantial upfront payment. If your lender sets up your escrow account close to the due date on your property taxes, they'll want enough funds to cover the bill. You may need to deposit multiple months worth of taxes upfront. If the due date is further off, the deposit amount may be smaller.
- It doesn't earn interest. The money in your escrow account doesn't grow with interest, so you could miss out on potential earnings. If your lender doesn't require an escrow account, you might save the money in a high-interest savings account or investment account to earn extra income before paying your property taxes and insurance.
The Bottom Line
Taxes are inevitable, and you must pay them on time to avoid potentially severe consequences. Paying your property taxes with your mortgage payment is a convenient way to "set it and forget it." As long as you make your monthly mortgage payments, your lender or loan servicer should make sure the taxes are paid using your escrow account.
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