Is Your Property Tax Included in Your Mortgage?

Property tax is a local government levy on real estate, typically collected annually or semi-annually, based on the property’s assessed value. This tax helps fund local services like schools, police, and infrastructure. A mortgage, on the other hand, is a loan obtained from a lender to purchase real estate, with the property serving as collateral for the debt. While these are distinct financial obligations, they often interact, particularly concerning how property taxes are paid in conjunction with a mortgage.

Understanding Escrow Accounts

An escrow account, in the context of a mortgage, is a specialized account managed by your mortgage lender or servicer. This account is designed to collect and hold funds for property taxes and homeowner’s insurance premiums. Each month, an additional amount is collected from you and deposited into this escrow account, alongside your regular principal and interest payment. The lender then uses these accumulated funds to pay your property tax and insurance bills on your behalf when they become due.

From a lender’s perspective, escrow’s primary purpose is to mitigate risk by ensuring property taxes and insurance are paid promptly. Unpaid property taxes can lead to a tax lien on the property, which could take precedence over the mortgage lender’s claim. For homeowners, escrow offers convenience and helps with budgeting, as it breaks down large, infrequent tax and insurance bills into smaller, more manageable monthly installments. Escrow amounts are typically calculated by estimating total annual property taxes and insurance premiums, dividing that sum by twelve, and adding a small cushion, often limited to two months’ worth of payments, as permitted by the Real Estate Settlement Procedure Act (RESPA).

Reasons for Inclusion or Exclusion

Whether property taxes are included in your mortgage payment via an escrow account depends on several factors, including the type of loan and the amount of your down payment. Certain loan programs mandate escrow regardless of down payment size. For example, government-backed loans such as Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans typically require an escrow account. This ensures essential property expenses are consistently covered.

For conventional loans, inclusion depends on your loan-to-value (LTV) ratio, influenced by your down payment. If you make a down payment of less than 20% of the home’s purchase price, lenders generally require an escrow account. A lower down payment signifies higher risk for the lender, making them more likely to ensure taxes and insurance are paid.

Conversely, if you make a down payment of 20% or more on a conventional loan, you might have the option to waive the escrow requirement. You would then be responsible for paying your property taxes and insurance premiums directly. Lender policies vary; some may offer a waiver for a fee, others might still require escrow based on internal guidelines.

Checking Your Mortgage for Property Tax Inclusion

To determine if property taxes are included in your mortgage payment, review key documents and resources. The most straightforward method is to examine your monthly mortgage statement. Statements typically provide a detailed breakdown of your payment, separating amounts allocated to principal, interest, and any escrowed funds for taxes and insurance. Look for a line item specifically labeled “escrow” or “escrow payment.”

Your original loan agreement or closing disclosure, received when you finalized your mortgage, is another reliable source. These documents outline loan terms, including whether an escrow account was established at closing. If uncertain, contact your mortgage servicer—the company to whom you make your monthly payments. They can confirm if property taxes are part of your payment and provide a full breakdown of your account. If you consistently receive property tax bills directly from your local municipality, it suggests you are responsible for paying them yourself; if bills go directly to your lender, they are likely paid through escrow.

Paying Property Taxes Without Escrow

If property taxes are not included in your mortgage payment, you are responsible for managing and paying them. This involves receiving property tax bills directly from the local taxing authority, such as the city or county. Bills specify the amount due and payment deadlines. Property taxes are commonly due annually or semi-annually, requiring larger, lump-sum payments rather than smaller monthly contributions.

To prepare for these payments, proactively budget and set aside funds throughout the year. Many homeowners create a separate savings account and deposit a portion of the estimated annual tax amount into it each month, ensuring sufficient funds are available when the bills arrive. Timely payment avoids financial repercussions. Failure to pay property taxes by the due date can result in penalties, accrued interest, and a tax lien on your property. In severe cases of prolonged non-payment, the taxing authority could initiate a tax sale or foreclosure to recover unpaid taxes, potentially leading to the loss of the property.