Do Mortgage Companies Pay Property Taxes?

When considering property taxes, many homeowners wonder if their mortgage company directly pays these levies. Mortgage companies do not pay property taxes from their own funds; rather, they facilitate the payment on behalf of the homeowner. This arrangement typically occurs through an escrow account, which helps ensure that property taxes are paid on time, thereby protecting the lender’s financial interest in the property.

Understanding Property Tax Escrow Accounts

An escrow account, in the context of mortgages, is a specialized account managed by the mortgage servicer. Funds are collected from the homeowner as part of their regular monthly mortgage payment and held until property tax payments are due. These funds remain the homeowner’s property, specifically designated for tax obligations and often for homeowner’s insurance premiums.

Lenders typically require or strongly encourage the use of escrow accounts. This practice mitigates risk by ensuring timely payment of property taxes, which could otherwise lead to a lien on the property. By managing these payments, the mortgage company helps prevent the property from being at risk.

How Property Taxes are Paid Through Escrow

When an escrow account is in place, a portion of the homeowner’s monthly mortgage payment is allocated to this account. The mortgage servicer is responsible for holding these accumulated funds and then disbursing them directly to the local taxing authority when property tax bills become due. This system ensures that large, infrequent tax bills are broken down into more manageable monthly contributions.

Mortgage servicers conduct an annual escrow analysis to ensure sufficient funds are collected to cover upcoming tax obligations. This analysis reviews the previous year’s account activity and projects the expenses for the next 12 months. Adjustments to the monthly mortgage payment may occur if there is a projected shortage or surplus in the escrow account due to changes in property tax assessments or insurance premiums. Federal law regulates how lenders manage escrow accounts.

When Homeowners Pay Property Taxes Directly

While escrow accounts are common, there are scenarios where homeowners are responsible for paying property taxes directly. This often happens for properties without an active mortgage, such as those that have been paid off. In such cases, the homeowner assumes full responsibility for tracking due dates, receiving tax bills, and making timely payments to the local taxing authority.

Some homeowners with a mortgage may also choose to pay taxes directly if their lender allows it, particularly if they made a significant down payment. Waiving escrow, if permitted by loan terms, means the homeowner must proactively manage these payments. Failure to pay property taxes can lead to serious consequences, including penalties, interest charges, and the placement of a tax lien on the property. Delinquent property taxes could result in the property being sold in a tax sale.