Are Property Taxes Included in a Mortgage?
Understand the interplay between property taxes and your mortgage, clarifying how these costs are typically managed within homeownership.
For many homeowners, property taxes are a component of their regular monthly mortgage payment. While this arrangement is common, it is not universally true for all mortgages or all homeowners. Understanding how property taxes integrate with mortgage payments is important for accurately budgeting for homeownership costs.
Components of Your Monthly Mortgage Payment
A typical monthly mortgage payment is described by the acronym PITI: Principal, Interest, Taxes, and Insurance. The principal is the portion of your payment that directly reduces the loan balance you borrowed for the home. Interest is the cost of borrowing, paid to the lender. These two components, principal and interest, are paid directly to the mortgage lender.
The “T” in PITI stands for property taxes, which are levied by local governments. The final “I” refers to homeowners insurance, covering damage or loss to the property. For most mortgages, the tax and insurance portions are collected by the lender, along with the principal and interest, to be paid on the homeowner’s behalf. This payment structure helps streamline housing-related expenses.
The Escrow Account for Property Taxes
When property taxes are included in your mortgage payment, they are managed through an escrow account. An escrow account is maintained by your mortgage lender to hold funds for property taxes and homeowners insurance. Each month, a portion of your mortgage payment is deposited into this account. This allows for the accumulation of funds to cover large, infrequent bills.
When property tax bills are due, the lender uses the accumulated funds in the escrow account to pay the local taxing authority. This ensures that taxes are paid on time, helping homeowners avoid penalties or liens. It also offers a convenient way to budget for these annual or semi-annual expenses by spreading the cost across monthly payments.
Situations Where Taxes Are Paid Separately
While including property taxes in a mortgage payment via an escrow account is common, it is not mandatory. Some homeowners may pay their property taxes directly to the local taxing authority rather than through their mortgage lender. This arrangement can occur in specific circumstances.
Homeowners who make a substantial down payment (often 20% or more) may waive the escrow requirement. Certain loan types or lender policies may also permit direct payment of taxes. Additionally, individuals who purchase a home with cash do not have a mortgage and are solely responsible for paying all property taxes directly.
How Property Taxes Are Calculated
Property taxes are a primary source of revenue for local governments, funding public services including those provided by counties, cities, and school districts. The amount of property tax due is determined by two factors: the property’s assessed value and the local tax rate. The assessed value is an official valuation assigned by a local tax assessor for taxation.
This assessed value is multiplied by the local tax rate, often a “millage rate,” to determine the annual tax liability. A millage rate represents the dollars of tax per thousand dollars of assessed value. Property values and tax rates can change, leading to adjustments in the property tax portion of a homeowner’s housing expenses.