Is It Better to Pay Property Tax With Your Mortgage?

Homeowners often consider two primary approaches for property tax payments: incorporating them into their monthly mortgage or handling them directly. Paying property tax with a mortgage typically involves an escrow account, where the lender collects and disburses funds. There is no single “better” option; the most suitable choice depends on an individual’s financial habits, budgeting, and comfort with managing large expenses. Understanding each method helps in making an informed decision.

Understanding Mortgage Escrow Accounts

A mortgage escrow account is a dedicated savings account managed by your mortgage lender or servicer for property taxes and often homeowner’s insurance premiums. Each month, a portion of the estimated annual property tax and insurance costs is added to your regular mortgage payment. These funds are held in the escrow account until bills are due, then the lender uses them to pay taxing authorities and insurance providers directly on your behalf.

Lenders require an escrow account to mitigate risk by ensuring property taxes and insurance premiums are paid on time. Unpaid property taxes can lead to tax liens on the property, which could take precedence over the mortgage lender’s claim in a foreclosure scenario. Lapsed homeowner’s insurance leaves the collateral unprotected against damage. Escrow accounts protect the lender’s investment.

The amount collected for escrow is an estimate based on prior year’s property tax assessments and insurance premiums. Lenders conduct an annual escrow analysis to review account activity and project future expenses. If a shortfall occurs due to increased taxes or premiums, the lender may increase your monthly escrow contribution or request a lump-sum payment. If an overage occurs, you might receive a refund.

Direct Property Tax Payments

Paying property taxes directly means the homeowner is solely responsible for receiving tax bills and remitting payments to the local or county tax assessor’s office. Tax bills are mailed directly to the homeowner, outlining the amount due and payment deadlines.

Common methods for direct property tax payment include:
Online portals, using electronic checks (eChecks) or credit/debit cards. Credit card payments may incur a convenience or processing fee.
Mailing a check or money order.
Making an in-person payment at the tax collector’s office.
Payment by phone, offered in some jurisdictions.

The frequency of property tax payments varies by jurisdiction, though annual or semi-annual payments are common. Some localities allow quarterly installments or monthly payment plans. Direct payment requires diligent financial planning to set aside funds throughout the year, preventing a scramble when a large sum is due.

Comparing Escrow vs. Direct Payment

Choosing between escrow and direct payment involves evaluating convenience against financial control and discipline. Escrow accounts offer convenience by bundling property tax payments into the monthly mortgage, simplifying financial management. This ensures taxes are paid automatically and on time, reducing the risk of missed deadlines, late fees, or potential liens. For homeowners who prefer a predictable monthly payment and less administrative burden, escrow provides peace of mind.

Direct payments offer homeowners greater financial control. This allows individuals to manage funds until the tax due date, potentially earning interest in an interest-bearing account. A direct payment method also results in a lower monthly mortgage payment, as the tax portion is not included. For those with strong budgeting habits, this control can be advantageous, optimizing cash flow and investment opportunities.

However, direct payment demands significant financial discipline. Homeowners must proactively save for large, periodic tax bills. Failing to set aside adequate funds can lead to financial strain or inability to pay taxes on time, incurring penalties. Homeowners are solely responsible for tracking due dates and ensuring correct payments are sent, a task the lender handles with an escrow account.

Escrow accounts can lead to variable monthly mortgage payments if property tax assessments change, potentially increasing housing costs even on a fixed-rate mortgage. Lenders adjust escrow amounts annually for these fluctuations, but some homeowners prefer stable mortgage principal and interest payments. Property tax payments are generally deductible for those who itemize deductions on their federal income tax return, regardless of the payment method. The choice ultimately depends on a homeowner’s comfort level with managing large, infrequent expenses versus the simplicity and automatic nature of an escrow account.