Are Property Taxes Usually Included in a Mortgage?

Property taxes are a levy imposed by local government entities on real estate, based on the property’s assessed value (an ad valorem tax). A mortgage is a financial loan used to acquire or maintain real estate, with the property serving as collateral. Understanding how these two financial obligations interact is important for homeowners.

How Property Taxes Are Handled with a Mortgage

For most homeowners with a mortgage, property taxes are managed through an escrow account established by the lender. This dedicated holding account collects funds from the homeowner to cover property taxes and homeowner’s insurance. Each month, a portion of the estimated annual property tax bill is added to the regular mortgage payment and deposited into this account.

This system simplifies financial management for the homeowner by spreading large, infrequent tax payments into smaller, predictable monthly contributions. When property tax bills are due, the lender disburses funds directly from the escrow account to the taxing authorities. This process helps ensure tax obligations are met on time, reducing the risk of penalties or liens on the property.

Federal regulations, specifically the Real Estate Settlement Procedures Act (RESPA), govern how lenders manage escrow accounts. Lenders can collect a monthly amount equal to one-twelfth of the total anticipated annual escrow payments. They may also maintain a cushion in the account, not exceeding one-sixth (or two months) of the total annual payments, to account for unexpected increases. Lenders conduct an annual escrow analysis to review activity, project expenses, and adjust the monthly payment as needed.

When Property Taxes Are Not Part of the Mortgage Payment

While escrow accounts are common, property taxes are not always included in the monthly mortgage payment, requiring the homeowner to pay them directly. One frequent scenario involves borrowers who make a substantial down payment when purchasing a home, often 20% or more of the property’s value. Lenders may offer to waive escrow requirements in such cases, recognizing the homeowner’s significant equity and reduced risk for the lender.

Homeowners with conventional loans, particularly those with a loan-to-value (LTV) ratio of 80% or less, might also qualify for an escrow waiver. Some lenders may allow a waiver if the loan is in good standing, typically at least one year old with no recent late payments. Certain government-backed loan programs, such as FHA loans, generally mandate escrow accounts, while others like VA loans may allow waivers depending on lender policies and borrower equity.

Lenders may also permit homeowners to opt out of escrow for a fee, typically a percentage of the loan amount. Even if a full waiver is not possible, some lenders allow certain components, like property taxes, to be removed from escrow while other payments, such as private mortgage insurance (PMI), remain. In these situations, the homeowner assumes full responsibility for tracking and submitting property tax payments directly to the local taxing authority by their due dates.

Homeowner Responsibility for Property Taxes

Regardless of whether property taxes are paid through an escrow account or directly by the homeowner, the ultimate responsibility for these payments rests with the property owner. Local government entities, such as counties or municipalities, periodically assess the value of real estate within their jurisdiction to determine the amount of property tax owed. This assessment process typically involves evaluating factors like the property’s size, construction, age, amenities, and market conditions.

Property taxes can fluctuate over time due to several factors, including general market value changes, property improvements, or adjustments in local tax rates (also known as mill rates). Local assessors may revalue properties periodically to ensure assessments reflect current market conditions. Homeowners typically receive a notice of assessment, detailing the property’s valuation and the calculated tax amount.

Failure to pay property taxes can lead to serious consequences for the homeowner. Unpaid taxes become a lien on the property, meaning the local government has a claim against the asset. If delinquent taxes are not paid, the taxing authority can initiate procedures that may result in the sale of the property to satisfy the debt, potentially leading to foreclosure and the loss of the home. In some cases, the tax lien may be sold to a third party, who can then pursue collection or acquire the property through a tax deed process.