Does My Mortgage Pay My Property Taxes?

A monthly mortgage payment repays a home loan, while property taxes are separate costs from local governments. Whether your mortgage payment also covers property taxes depends entirely on your loan agreement. Some loans are structured to include taxes, but this is not an automatic feature. Your loan terms determine if you pay the tax authority directly or if your lender manages the payments for you.

The Role of an Escrow Account

For many homeowners, property taxes are paid via an escrow account, which is a dedicated savings account managed by your mortgage servicer. With an escrow account, your total monthly payment is often called PITI: Principal, Interest, Taxes, and Insurance. Each month, the “T” (taxes) and “I” (insurance) portions of your payment are deposited into this account.

Your lender estimates your annual property tax and homeowners insurance bills, divides that amount by twelve, and adds it to your monthly principal and interest payment. For example, if your annual property taxes are $3,600 and your homeowners insurance is $1,200, your lender would collect an additional $400 per month for escrow. When property tax bills are due, your mortgage servicer uses the accumulated funds to pay the local tax authority directly on your behalf.

This arrangement is common and sometimes required for loans with a down payment under 20% or for government-backed loans like FHA loans. Lenders require this to ensure taxes are paid on time, as an unpaid tax bill can result in a lien against the property that takes priority over the mortgage.

Paying Property Taxes Directly

The alternative is paying property taxes directly to the local tax authority. This applies when a mortgage does not have an escrow account, so the monthly payment to the lender only covers principal and interest. The homeowner is then fully responsible for managing and paying property taxes.

Without an escrow account, you must budget for property tax bills, which are often large and paid annually or semi-annually. It is your responsibility to know the due dates to avoid penalties. Missing these payments can lead to significant fines or a tax lien on your home, which could lead to foreclosure.

Some homeowners prefer this method for the control it offers, allowing them to earn interest on money set aside for taxes. An “escrow waiver” may be possible for borrowers with substantial home equity, often over 20%, but it may come with a fee.

How to Verify Your Payment Method

You can verify your payment method by checking several key documents and contacts:

• Your monthly mortgage statement. Look for a line item specifically labeled “escrow” or “taxes.” The statement should provide a clear breakdown of how your total payment is allocated between principal, interest, and escrow.
• Your Closing Disclosure. This document details your loan terms. The “Projected Payments” section will show a calculation of your total monthly payment, including a line for “Estimated Escrow” covering property taxes and insurance.
• Your mortgage servicer. Contacting their customer service department is a direct way to confirm whether you have an escrow account and how your property taxes are being handled.
• Your local tax assessor’s office. Their public records will show who made the most recent tax payment; if it was your lender, their name will be listed as the payer.

Understanding Escrow Analysis and Adjustments

If you have an escrow account, your monthly mortgage payment can change annually. This is due to an annual escrow analysis, which federal law (RESPA) requires lenders to perform. The analysis reviews your escrow account to ensure the amount being collected is sufficient for upcoming property tax and insurance bills. During the analysis, the lender compares the funds collected with the amounts paid out and projects costs for the next year.

If the analysis reveals that not enough money was collected, an escrow shortage occurs. This is often caused by increases in local property tax rates or insurance premiums. To correct a shortage, your lender will increase your monthly mortgage payment for the upcoming year to cover both the deficit and the higher anticipated costs.

Conversely, if the analysis shows more money was collected than needed, an escrow surplus exists. If the surplus is $50 or more, the lender must refund that amount to you. If the surplus is less than $50, the lender may refund it or apply it as a credit to your account, which can lower your monthly payments.