Does Escrow Include Property Taxes? How It Works

Homeownership involves navigating various financial processes, including managing property-related costs associated with a mortgage. Escrow accounts play a role in handling these expenses. This article explores the common inclusion of property taxes within these accounts and outlines the general process.

Understanding Escrow Accounts

An escrow account, in the context of a mortgage, functions as a dedicated holding account for specific property-related expenses. Its purpose is to ensure funds are collected to cover recurring costs like property taxes and homeowner’s insurance premiums. Mortgage lenders or loan servicers typically manage these accounts. Funds are deposited through regular monthly mortgage payments, with a portion allocated to escrow alongside the principal and interest. This arrangement helps homeowners budget for annual or semi-annual expenses by spreading the cost over 12 months.

Property Taxes and Escrow

Property taxes are commonly, and often mandatorily, included in mortgage escrow accounts. This protects the lender’s investment, as unpaid property taxes can lead to tax liens that take precedence over mortgage liens, potentially jeopardizing collateral. The mortgage servicer collects an estimated portion of the annual property tax bill with each monthly payment. These funds are held in escrow. When property tax bills become due, the servicer pays them directly from the escrow account on the homeowner’s behalf, ensuring timely payment. This system simplifies the process for homeowners by integrating tax payments into their regular mortgage schedule, reducing the risk of missed deadlines and associated penalties.

Managing Your Escrow Account Balance

Mortgage servicers conduct an annual escrow analysis to ensure the account has sufficient funds for upcoming tax and insurance obligations. This analysis compares projected expenses with actual amounts disbursed and funds collected. Federal law requires this annual review to adjust for changes in property tax assessments or insurance premiums. If the analysis reveals a surplus, the servicer typically refunds the excess to the homeowner. Federal regulations often require a refund if the surplus is $50 or more, usually within 30 days. If a deficit is identified, the homeowner may need to cover the difference. Options include a lump-sum payment or spreading the deficit over monthly mortgage payments, commonly 12 months. Homeowners can access statements or online portals to monitor their escrow account balance and review disbursement details.

Situations Without Escrow for Property Taxes

While common, escrow accounts for property taxes are not universally required. For cash purchases, a mortgage is not involved, and the homeowner directly manages all property expenses. For financed homes, a large down payment (often 20% or more) may allow a homeowner to opt out of an escrow account if permitted by the lender and loan terms. Certain loan types, such as FHA and VA loans, typically mandate escrow. When property taxes are not escrowed, the homeowner assumes direct responsibility for tracking due dates and making payments to the appropriate taxing authorities. Failing to pay can lead to significant consequences, including penalties, interest, a tax lien, or even foreclosure.