How to Add Property Tax to Your Mortgage

Homeownership involves various financial responsibilities, and property taxes represent a recurring obligation that can significantly impact a homeowner’s budget. Many homeowners find it beneficial to integrate their property tax payments directly into their monthly mortgage payment. This approach streamlines financial management by consolidating housing-related expenses into a single, predictable sum, helping ensure timely payment.

Understanding Escrow

An escrow account is a financial arrangement established by a mortgage lender to manage property-related expenses for the homeowner. Its primary function is to collect and hold funds for property taxes and often for homeowner’s insurance premiums. This safeguards the lender’s investment by ensuring these obligations are met, preventing potential liens.

Each month, the mortgage servicer collects a portion of the estimated annual property tax, along with the regular principal and interest payment. These funds are deposited into the escrow account. When property tax bills are due, the lender uses the accumulated funds to pay the tax authority directly. This system offers convenience by eliminating the need to save large sums for tax payments and helps ensure timely, accurate payments.

Determining Eligibility and Gathering Information

Before homeowners can integrate property taxes into their mortgage payments through an escrow account, they must consider eligibility factors and prepare documentation. Lender policies vary, with some requiring escrow accounts for all loans, while others offer it as an option. Government-backed loans, such as FHA and VA loans, frequently mandate escrow for property taxes and insurance.

Conventional loans, particularly those with a down payment of less than 20%, often necessitate an escrow account. Homeowners with a loan-to-value (LTV) ratio of 80% or less may have the option to waive escrow.

To initiate the process, homeowners should gather specific information. This includes the most recent property tax bill, which provides details such as the assessed value, tax rate, parcel number, and due dates. The mortgage loan number and any relevant financial statements should also be readily available. Compiling these documents beforehand helps ensure a smoother application process for establishing an escrow account.

Setting Up Your Escrow Account

Once eligibility is confirmed and all necessary information is compiled, the next step is setting up the escrow account with the mortgage lender. Homeowners can initiate this by contacting their lender’s customer service department, often through a dedicated phone line or an online portal. The lender will then provide specific instructions and any required forms.

During this setup phase, the lender calculates the initial escrow deposit and the new monthly payment amount. This calculation involves estimating the annual property taxes and insurance premiums, dividing that total by twelve, and adding it to the existing principal and interest payment. Lenders often include a cushion in the initial deposit to cover potential increases in tax rates or insurance premiums. After the homeowner agrees to the terms and signs the necessary documentation, the lender adjusts the monthly mortgage statement to reflect the inclusion of the escrow amount, consolidating these payments into one.

Managing Your Escrow Account

After the escrow account is established, the mortgage servicer manages it on an ongoing basis. A key aspect of this management is the annual escrow analysis. This yearly review assesses the funds collected versus the actual payments made for property taxes and insurance over the past year.

The analysis projects the anticipated expenses for the upcoming year and determines if the current monthly escrow contribution is sufficient. If there’s a surplus in the account, the homeowner may receive a refund or a credit towards future payments. Conversely, if a deficit is identified due to unexpected increases in property taxes or insurance premiums, the monthly mortgage payment will be adjusted upwards to cover the shortfall. Homeowners receive a statement detailing the results of this analysis, including any changes to their monthly payment, and should review it carefully for accuracy.