Can You Include Property Taxes in Your Mortgage?
Navigate the relationship between property taxes and your mortgage. Gain clarity on how these essential homeownership costs are managed.
When purchasing a home, many people focus on the principal and interest components of their mortgage payment. However, a complete mortgage payment often includes other significant costs associated with homeownership. These additional amounts cover recurring property-related expenses, such as property taxes and homeowners insurance, ensuring various obligations are met throughout the year.
Understanding Mortgage Escrow Accounts
A mortgage escrow account is a specialized account managed by your mortgage lender or loan servicer. It collects and disburses funds for specific property-related expenses on your behalf. Its primary purpose is to simplify the payment of recurring costs such as property taxes and homeowners insurance premiums, streamlining the process for homeowners.
Funds are collected by incorporating a portion of these anticipated expenses into your regular monthly mortgage payment. Each month, an amount for property taxes and insurance is deposited into the escrow account. The lender holds these funds in a separate, non-interest-bearing account.
When property tax or insurance bills become due, your lender uses the accumulated money in your escrow account to pay them. This arrangement ensures these important bills are paid on time, preventing potential penalties, late fees, or lapses in coverage. This convenience of having payments managed by a third party, breaking down large expenses into smaller monthly contributions, benefits many homeowners.
When Property Taxes are Included in Mortgage Payments
Whether property taxes are included in your monthly mortgage payment via an escrow account depends on several factors, including loan type, lender policies, or the amount of equity in your home. Often, including property taxes in escrow is a requirement designed to protect the lender’s investment.
Certain government-backed loans, such as those insured by the Federal Housing Administration (FHA) and most loans guaranteed by the Department of Veterans Affairs (VA), typically require an escrow account for property taxes and insurance premiums. This requirement serves as a safeguard for lenders, ensuring taxes and insurance are consistently paid and reducing the risk of liens or uninsured property damage.
For conventional loans, the escrow requirement is often tied to the loan-to-value (LTV) ratio. Lenders commonly mandate escrow if your down payment is less than 20% of the home’s purchase price (LTV above 80%). This is because a lower equity stake presents a higher risk to the lender, and ensuring timely payment of taxes and insurance helps mitigate that risk.
In situations where the LTV is 80% or below, or for certain conventional loans, homeowners may have the option to waive the escrow requirement. Waiving escrow means you assume direct responsibility for paying property taxes and insurance premiums when they are due. Lenders offering an escrow waiver may require a strong credit history and could charge a one-time fee to compensate for the increased administrative burden and risk.
Managing Your Escrow Account
Once an escrow account is established, its management involves ongoing oversight by your loan servicer and periodic adjustments to ensure sufficient funds are collected. A primary component of this management is the annual escrow analysis, a review conducted by your lender to reconcile actual expenses against collected funds. This analysis helps determine if monthly contributions were adequate and to project costs for the upcoming year.
As a result of this annual analysis, your monthly mortgage payment may change. Fluctuations in property tax assessments or increases in homeowners insurance premiums directly impact the amount needed in the escrow account, leading to adjustments in your monthly contributions. Lenders are required to provide an annual escrow statement detailing the account’s activity and any changes to your future monthly payment.
The analysis can reveal either a surplus or a deficit in your escrow account. An escrow surplus occurs when collected funds exceed the amount needed to cover actual expenses. If a surplus is identified, typically over a certain threshold, the lender refunds the excess amount to the homeowner, often by check. Alternatively, homeowners may apply the surplus towards reducing their mortgage principal or crediting it toward future escrow payments.
Conversely, an escrow deficit means there were not enough funds in the account to cover expenses. This can happen if property taxes or insurance costs increased more than anticipated. When a deficit occurs, the homeowner will need to cover the shortfall, either through a lump-sum payment or by having their monthly mortgage payment increased for the next 12 months to recoup the shortage.