Is Property Tax Paid Through Mortgage?
Discover how property taxes integrate with your mortgage payments, exploring escrow accounts, lender roles, and direct payment options.
For many homeowners, property taxes are collected by the mortgage lender as part of their monthly mortgage payment. This amount is held in a dedicated escrow account. This arrangement offers convenience by consolidating payments and helps the lender ensure taxes are paid promptly, securing their investment.
Understanding Escrow Accounts
An escrow account, also called an impound account, is a specialized account managed by your mortgage servicer. It holds funds for property expenses beyond principal and interest, such as property taxes and insurance premiums. These components, with principal and interest, form PITI (Principal, Interest, Taxes, and Insurance).
The portion of your monthly mortgage payment for taxes and insurance goes into this account. These funds are held in reserve, not immediately applied to bills. The servicer then disburses these funds directly to taxing authorities and insurance providers when bills are due. This system helps homeowners budget for large, infrequent expenses by spreading costs over monthly installments.
How Lenders Manage Escrow Funds
Lenders manage escrow accounts by collecting an estimated portion of annual property taxes and insurance premiums with each monthly payment. They hold these funds until tax bills and insurance premiums are due, then pay these obligations on the homeowner’s behalf. This ensures timely payments and protects the lender’s investment by preventing tax liens or insurance lapses.
Lenders perform an annual escrow analysis to review the account’s activity and project future expenses. This analysis compares the funds collected with the actual amounts paid out for taxes and insurance over the past year. Based on this review, the lender may adjust the monthly escrow payment for the upcoming year to account for changes in property tax assessments or insurance costs, ensuring sufficient funds are available. A significant surplus may result in a refund, while a shortage might require a one-time payment or increased future contributions.
When Escrow is Required or Optional
Escrow account requirements depend on loan characteristics and lender policies. Loans with a down payment less than 20% of the property’s value often require an escrow account due to a higher loan-to-value (LTV) ratio. This helps mitigate lender risk.
Certain loan types, such as those insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA), typically mandate an escrow account. While the VA does not strictly require it, most VA lenders include escrow to ensure taxes and insurance are paid. Homeowners with substantial equity or making a large down payment on a conventional loan might waive escrow, subject to lender approval and a potential fee.
Paying Property Taxes Directly
Homeowners not required to maintain an escrow account, or who have opted out, are directly responsible for paying property tax bills. This means receiving bills from the local government and remitting payment by due dates. Property tax due dates vary by jurisdiction, with some areas having annual, semi-annual, or quarterly payment schedules.
Homeowners paying directly must budget for these lump-sum payments and be aware of deadlines to avoid penalties, interest, or potential tax liens. While this method offers more direct control, it shifts the responsibility of tracking and timely payment to the homeowner, contrasting with an escrow account’s automated convenience.