Do You Pay Property Taxes With Your Mortgage?

When considering a home purchase, prospective buyers often have questions about how costs like property taxes integrate with their monthly mortgage payments. Property taxes are a recurring obligation for homeowners, levied by local government entities to support public services. Understanding how these taxes are handled with a mortgage payment is important for financial planning. This article clarifies the relationship between property taxes and mortgage payments, detailing common payment methods and responsibilities.

What Are Property Taxes?

Property taxes are a levy imposed by local governments, including counties, cities, and school districts, on real estate within their jurisdiction. These taxes serve as a primary revenue source, funding essential public services such as schools, police and fire departments, and road maintenance. The amount of property tax assessed on a property is determined by multiplying its assessed value by the local tax rate.

Assessors evaluate the value of land and structures to establish an assessed value for each property. This assessed value may differ from the property’s market value, often being lower.

Property Taxes and Your Mortgage Lender

Mortgage lenders have an interest in ensuring property taxes are paid promptly. Unpaid property taxes can result in a tax lien on the property, which often takes precedence over the mortgage lien. If a homeowner defaults on their taxes, the property could be sold to satisfy the tax debt, potentially jeopardizing the lender’s collateral. To mitigate this risk, lenders frequently require or encourage homeowners to pay property taxes through an escrow account.

The requirement for an escrow account is a common loan condition, particularly for mortgages with a higher loan-to-value (LTV) ratio. By collecting funds for taxes as part of the monthly mortgage payment, lenders ensure sufficient money is set aside to cover these obligations when due. This system also helps homeowners avoid the financial burden of making large, lump-sum tax payments directly to the taxing authority.

How Escrow Accounts Work

An escrow account is a separate account managed by the mortgage servicer that holds funds for property taxes and homeowners insurance. Each month, a portion of the homeowner’s total mortgage payment is allocated to this escrow account, in addition to the principal and interest on the loan. The mortgage servicer collects these funds throughout the year, accumulating the necessary amount to cover annual or semi-annual property tax bills.

When property tax payments are due, the mortgage servicer disburses the funds directly from the escrow account to the appropriate taxing authorities on the homeowner’s behalf. This arrangement ensures tax obligations are met on time, reducing the risk of penalties or liens. The amount collected for escrow is an estimate based on the previous year’s tax bills and projected rates.

Each year, the mortgage servicer conducts an annual escrow analysis. This analysis reviews actual tax payments made over the past year and projects anticipated expenses for the upcoming 12 months. If the analysis reveals a surplus of funds, the homeowner may receive a refund. Conversely, if there is a shortage due to increased property taxes, the servicer may adjust the monthly escrow contribution, leading to a higher overall mortgage payment to cover the deficit.

Managing Your Property Tax Payments

Homeowners not utilizing an escrow account are responsible for paying their property taxes directly to the local taxing authority. This approach requires careful budgeting to ensure the full amount is available by the due dates, which vary by jurisdiction. Failing to pay property taxes on time can lead to significant penalties, including interest charges, late fees, and in some cases, a tax lien on the property. Penalties can include an initial percentage of the unpaid amount, with additional interest accruing monthly.

Some homeowners, particularly those with substantial equity or a lower loan-to-value (LTV) ratio, may have the option to waive the escrow requirement. Lenders allow this for conventional loans when the LTV is below a certain threshold and the borrower has a strong credit history and timely payments. Waiving escrow means the homeowner assumes full responsibility for tracking and paying property tax bills directly, which offers greater control over funds but also carries increased administrative and financial responsibility.

Understanding the components of a property tax bill is important for all homeowners. A tax bill includes details such as the property’s assessed value, applicable tax rates from various taxing units, due dates, and any exemptions. Homeowners should review their tax bills carefully for accuracy and be aware of any changes in assessed value or tax rates, as these will directly impact their tax liability. Increases in property tax assessments or rates will lead to higher tax bills, which, if paid through escrow, will result in an adjustment to the monthly mortgage payment.