Do You Pay Property Taxes With Your Mortgage?

Property taxes are a consistent financial obligation for homeowners, contributing to local public services like schools, emergency services, and infrastructure. While some homeowners integrate property tax payments with their mortgage, others manage these payments independently. The method of payment often depends on the mortgage agreement and the homeowner’s preference.

How Property Taxes Are Paid Through an Escrow Account

Many mortgage agreements include property tax payments as part of the monthly mortgage bill, managed through an escrow account. An escrow account acts as a financial tool where a portion of your monthly mortgage payment is held by the lender or mortgage servicer. These funds are then used to pay property taxes and homeowner’s insurance premiums on your behalf when they become due.

The monthly mortgage payment, when an escrow account is used, typically consists of four main components: Principal, Interest, Taxes, and Insurance, commonly referred to as PITI. The principal portion reduces the outstanding loan balance, while the interest is the cost of borrowing the money. The ‘T’ for taxes and ‘I’ for insurance are the amounts collected and placed into the escrow account.

Lenders calculate the estimated annual property taxes and insurance premiums, then divide this total by twelve to determine the monthly amount added to your mortgage payment. This collected amount is held in the escrow account until the tax authority or insurance company’s bills are due. When the due dates arrive, the lender or servicer disburses the funds directly from the escrow account, ensuring payments are made promptly.

Using an escrow account offers convenience by consolidating multiple payments into a single monthly mortgage bill, reducing the need to track various due dates. It also aids in budgeting by spreading out large, infrequent tax and insurance payments over the entire year, preventing substantial lump-sum payments. From the lender’s perspective, requiring an escrow account protects their investment by ensuring property taxes, which can lead to tax liens or foreclosure if unpaid, are consistently settled.

Paying Property Taxes Directly

Homeowners may also pay property taxes directly to the local taxing authority rather than through a mortgage escrow account. This method is common for individuals who do not have a mortgage, have paid off their mortgage, or whose loan-to-value (LTV) ratio meets specific lender requirements, often 80% or less for conventional loans. Some specific loan types, such as certain FHA loans, may mandate an escrow account throughout the loan’s life.

When paying directly, the homeowner assumes full responsibility for tracking property tax bills, understanding due dates, and remitting payments. Property tax bills are typically issued annually, though some localities may require semi-annual or quarterly payments. For example, some areas might have two installments due in November and February, or July and January.

Homeowners receiving direct bills must proactively set aside funds to cover these payments, as they will not be collected as part of a monthly mortgage payment. This requires careful financial planning to avoid a large, unexpected expense. Many local tax offices offer various payment options, including in-person payments, mail, or electronic payments through their websites.

Failing to pay property taxes directly can lead to serious consequences. Unpaid taxes can result in penalties, interest charges, and the placement of a tax lien on the property. A tax lien is a legal claim against the property, which takes priority over other debts, including mortgages. In severe cases of delinquency, the property could be subject to a tax sale or foreclosure, leading to the loss of the home.

Managing Your Property Tax Payments

Regardless of whether property taxes are paid via escrow or directly, homeowners have an ongoing responsibility to understand and manage these obligations. For those with an escrow account, lenders perform an annual escrow analysis, which compares the actual tax and insurance disbursements from the previous year with the projected needs for the upcoming 12 months.

Adjustments to the monthly escrow payment occur if there is a discrepancy between the funds collected and the amounts needed. For instance, if property values or local tax rates increase, or insurance premiums rise, a shortage may occur, leading to an increase in the monthly mortgage payment to cover the deficit. Conversely, if there is a surplus in the account, the homeowner may receive a refund or a reduction in future monthly payments.

Property taxes are calculated by multiplying the property’s assessed value by the local tax rate. The assessed value is an estimate of the property’s market value, determined by a local assessor based on factors like recent sales of comparable properties, improvements, and location. Homeowners can typically find information about their property’s assessment and local tax rates on their county assessor’s website or through their annual tax bills.

Homeowners should review their annual property tax assessments and escrow analysis statements carefully. It is important to verify the accuracy of the assessed value and the tax amounts. If any discrepancies are found, homeowners should communicate promptly with their lender regarding escrow accounts or directly with the local taxing authority for direct payments.