Does Your Mortgage Payment Include Property Tax?

When you make a mortgage payment, whether it covers your property taxes depends on if an escrow account is utilized. While common, especially with certain loan types or smaller down payments, it is not universally true for all mortgages.

The Role of Escrow Accounts

An escrow account is a dedicated holding account managed by your mortgage lender. Each month, a portion of your total mortgage payment is allocated to this account, alongside the principal and interest components. This arrangement ensures funds accumulate over time to cover recurring property-related expenses like taxes and homeowners insurance.

When property tax and insurance bills become due, the lender draws from the escrow account to pay them directly to the taxing authority or insurance provider on your behalf. This process helps homeowners avoid the burden of large, infrequent lump-sum payments for these obligations.

Lenders often require an escrow account, particularly for conventional mortgages where the down payment is less than 20% of the home’s value, or for government-backed loans such as FHA loans. This requirement safeguards the lender’s interest in the property by ensuring that taxes, which can result in a lien if unpaid, are consistently remitted. While your mortgage payment includes these amounts, the lender acts as a facilitator, not the ultimate payer of the tax itself.

Paying Property Taxes Independently

Some homeowners have the option to manage property tax payments directly, bypassing the mortgage escrow account. This scenario typically arises when a borrower has significant equity in their home, such as a loan-to-value (LTV) ratio of 80% or less, or has made a substantial down payment. Conventional loans offer more flexibility regarding escrow waivers compared to certain government-backed loans that generally mandate escrow.

When an escrow waiver is granted, the homeowner assumes full responsibility for tracking property tax due dates and remitting payments directly to the local taxing authorities. Property taxes are usually due once or twice a year, representing a substantial financial obligation. Homeowners must budget diligently for these lump-sum payments to avoid penalties for late remittance.

Property taxes remain a non-negotiable obligation tied to property ownership. Failure to pay these taxes can result in severe consequences, including liens on the property and, ultimately, foreclosure. Therefore, independent management requires careful financial planning and a clear understanding of local tax assessment and payment schedules.

Managing Escrow Account Adjustments

Mortgage lenders conduct an annual review of your escrow account, known as an escrow analysis, to ensure sufficient funds are collected for property taxes and insurance. This analysis compares actual expenses paid in the previous year to the amounts collected and projects anticipated costs for the upcoming year. Changes in property tax assessments or insurance premiums directly influence the amount needed in the escrow account.

If the analysis reveals insufficient funds, an escrow shortage occurs. This often happens if property taxes increase due to reassessments or changes in local tax rates. The lender typically offers options to address the shortage: pay the deficit in a single lump sum or spread the amount across the next 12 monthly mortgage payments, leading to a temporary increase in your payment.

Conversely, an escrow surplus occurs when more funds were collected than necessary. This can happen if property taxes decrease or if the lender overestimated future expenses. If a surplus of $50 or more is identified, federal regulations generally require the lender to refund the excess amount to the homeowner within 30 days. For smaller surpluses, the lender may apply the amount as a credit to future escrow payments, potentially lowering subsequent monthly payments.