Are Property Taxes Included in a Mortgage?

When acquiring a home, a mortgage is a long-term loan provided by a financial institution to finance the purchase of real estate. The property itself serves as collateral for this loan. Property taxes are recurring fees levied by local governments based on the property’s value, funding public services like schools, roads, and emergency services. Understanding how these two financial obligations intersect is important for homeownership.

Understanding Your Monthly Payment

A homeowner’s monthly mortgage payment encompasses more than just the loan repayment. This comprehensive payment is commonly referred to by the acronym PITI, which stands for Principal, Interest, Taxes, and Insurance.

The “Principal” portion reduces the outstanding loan balance. “Interest” is the cost of borrowing, calculated as a percentage of the remaining principal balance; as this balance decreases, the interest paid also declines. “Taxes” represent property taxes assessed by local authorities, often collected monthly by the mortgage lender. “Insurance” includes homeowners insurance, which protects the property against damage, and may also include private mortgage insurance (PMI) if the down payment was less than 20% on a conventional loan, or a mortgage insurance premium (MIP) for FHA loans. These components together determine the total monthly housing expense.

The Role of Escrow Accounts

Escrow accounts manage property taxes and homeowners insurance payments for many mortgage holders. An escrow account is a specialized account managed by the mortgage lender or servicer. It holds funds collected from the homeowner to pay these expenses when due. A portion of the monthly mortgage payment is deposited into this account, ensuring sufficient funds accumulate for property tax bills and insurance premiums.

Lenders often require escrow accounts to safeguard their investment in the property. This ensures property taxes are paid on time, preventing tax liens that could take precedence over the mortgage, and that insurance coverage remains active, protecting against property damage. Annually, lenders perform an escrow analysis to ensure adequate funds for upcoming tax and insurance payments. This analysis may lead to adjustments in the monthly escrow payment, increasing it if there’s a projected shortage or potentially issuing a refund if there’s a surplus.

Scenarios for Property Tax Payment

The method homeowners pay property taxes varies, primarily depending on lender requirements and financial situation. In many instances, especially with a lower down payment, lenders require property taxes to be included in the monthly mortgage payment and managed through an escrow account. This is a common practice for loans with a loan-to-value (LTV) ratio exceeding 80%, meaning the amount borrowed is more than 80% of the home’s value, as it reduces risk for the lender.

Certain loan types, such as those insured by the Federal Housing Administration (FHA), mandate the use of an escrow account for property taxes, homeowners insurance, and mortgage insurance premiums, regardless of the down payment amount. This ensures consistent payment of these obligations. However, homeowners with substantial equity, often those with a down payment of 20% or more, may have the option to pay their property taxes directly to the local taxing authority. While direct payment offers more control over funds and potential interest earnings, it requires monitoring due dates and managing lump-sum payments.