Are Property Taxes Included in Mortgage Payments?

Property taxes are often included in monthly mortgage payments. While this arrangement is widespread, it is not universal for all mortgage types or homeowner situations. When included, property taxes are typically managed through a dedicated account, ensuring these obligations are met on time. This system simplifies financial management for the homeowner and mitigates risk for the lender.

Understanding Escrow Accounts

An escrow account serves as a dedicated holding place for funds collected by a mortgage lender to cover property taxes and homeowner’s insurance premiums. Its purpose is to ensure these recurring bills are paid promptly, protecting the lender’s investment in the property. Lenders manage these accounts as a financial intermediary on behalf of the homeowner.

To fund the escrow account, the mortgage lender calculates the annual cost of property taxes and insurance, then divides this total by twelve. This monthly amount is added to the principal and interest portions of the mortgage payment, forming what is sometimes referred to as a PITI payment (Principal, Interest, Taxes, and Insurance). Each month, a portion of the homeowner’s payment is deposited into this account, accumulating funds until the tax and insurance bills become due. This breaks down large, infrequent expenses into smaller, more manageable monthly contributions.

How Property Taxes Are Paid Through Escrow

When property taxes are included in a mortgage payment, the lender takes responsibility for submitting these payments to local taxing authorities. As funds accumulate in the escrow account from monthly mortgage payments, the lender disburses the property tax payments when they are due. This ensures property tax obligations are met, preventing issues like tax liens that could jeopardize the lender’s security interest in the property.

Mortgage servicers conduct an annual escrow analysis to review the account’s activity and adjust future payments as needed. This analysis compares estimated tax amounts with actual taxes paid, accounting for any increases or decreases in the property tax assessment. If the analysis reveals a surplus, the homeowner may receive a refund. Conversely, if there is a shortage or deficiency, the lender will adjust the monthly escrow payment upward to cover the shortfall.

When Property Taxes Are Not Included

Property taxes are not always included in a mortgage payment. In certain situations, homeowners may have the option or be required to pay their property taxes directly to the local authorities. One common scenario where taxes might not be escrowed is when a homeowner makes a substantial down payment on a conventional loan. Lenders may view a larger equity stake as reducing their risk, making them more flexible about waiving the escrow requirement.

Certain loan types, such as FHA or USDA loans, mandate escrow accounts for taxes and insurance, regardless of the down payment amount. For conventional loans, an escrow waiver might be possible if specific criteria are met, including a strong credit score, a history of on-time payments, and a loan-to-value (LTV) ratio below a certain threshold. If property taxes are not included in the mortgage payment, the homeowner assumes full responsibility for budgeting for and directly submitting tax payments on time to avoid penalties or liens against the property.