Is Property Tax Part of Your Mortgage?
Decode how property taxes are handled within your mortgage, or if they are paid separately. Understand key homeowner payment structures.
Property tax is often included in a homeowner’s monthly mortgage payment, but it is not part of the mortgage loan itself. The mortgage represents the loan for the home, a debt owed to a financial institution. Property taxes, conversely, are a separate and distinct obligation levied by local government entities to fund public services.
Understanding Mortgage Payment Components
A typical monthly mortgage payment includes four main components, known as PITI: Principal, Interest, Taxes, and Insurance. Principal is the portion of the payment that directly reduces the outstanding loan balance. Interest is the cost of borrowing the money, calculated as a percentage of the remaining principal balance.
Property taxes are assessed by local authorities based on home value and fund local services like schools and infrastructure. Homeowners insurance premiums cover potential damage or loss to the property, protecting both the homeowner and the lender’s investment. While principal and interest payments repay the mortgage loan, taxes and insurance are separate financial obligations. Lenders often collect these funds as part of the monthly mortgage payment to ensure these important bills are paid, protecting their financial interest in the property.
The Escrow Account Explained
An escrow account is a specialized account established by the mortgage lender to hold homeowner funds. Its purpose is to manage and disburse payments for property taxes and homeowners insurance premiums. This safeguards the lender’s investment by ensuring these obligations are met.
Lenders often require or offer escrow accounts, especially for borrowers with less than 20% down on a conventional loan. Government-backed loans (FHA, VA) typically mandate escrow accounts. Escrow provides convenience by consolidating payments into one monthly bill, while assuring the lender that taxes are current and insurance is active.
How Escrow Accounts Function
Annually, the lender estimates property taxes and insurance premiums for the upcoming year. This annual amount is divided by 12 and added to the monthly principal and interest payment. Each month, these collected funds are deposited into the escrow account.
When property tax bills or insurance premiums become due, the mortgage servicer uses the funds in the escrow account to make these payments on the homeowner’s behalf. This covers large, infrequent bills without requiring separate savings. Annually, the lender conducts an escrow analysis. This analysis reviews actual expenses against collected amounts, adjusting the monthly contribution for the next year based on changes in tax rates or insurance premiums. A surplus may result in a refund or credit; a shortage may increase the monthly payment to cover the deficit.
Direct Property Tax Payments
Some homeowners pay property taxes directly to the local tax authority, not through escrow. This often occurs with a substantial down payment on a conventional loan (e.g., 20% or more). Lenders may waive escrow, allowing independent management. Homeowners who have paid off their mortgage also pay taxes directly.
Direct payment requires tracking varying due dates (annual, semi-annual, quarterly) and ensuring timely remittance to avoid penalties. This requires diligent financial management to set aside funds. While offering control, it places the full burden of remembering and making large, periodic payments on the homeowner.