Are Property Taxes Included in Mortgage?

Yes, property taxes may be included in your monthly mortgage payments if required by your lender in your mortgage agreement. It can be an opportunity to pay property taxes in small amounts every month instead of a large sum annually or semi-annually. As part of this arrangement, you pay one-twelfth of the annual property tax bill into an escrow account monthly.

Here is everything you must know about the inclusion of property taxes in your mortgage.

Understanding Mortgage Payment Components

You must understand that a mortgage payment is made up of a few parts. In short, these parts are called PITI:

Principal: It is the amount allocated to reduce your loan balance.

Interest: The cost of borrowing from the lender.

Taxes: Property taxes (if included)

Insurance: Homeowners insurance and PMI or private mortgage insurance if applicable.

While it is not required for every loan, the taxes, and interest charges added on top of your mortgage payments are collected and managed using an escrow account and paid when they come due. If the escrow account balance lacks the required amount, your mortgage loan services will usually adjust your monthly payment. In the case of a surplus, they will send you a check.

Mortgage Escrow Account

The mortgage servicer sets up a mortgage escrow account when you apply for a mortgage. This account covers your property taxes and insurance. Think of it as a savings account funded by adding escrow payments to your monthly mortgage payment. It is managed by the lender to pay certain property-related expenses for you.

Sounds tricky? Let us clear it for you. Suppose your property taxes and insurance premiums are worth a total of $6,000 annually—your lender will divide it into 12 monthly escrow payments, which will be $500 per month and included with your mortgage payments. Your servicer deposits these funds into the escrow account, using them to pay for your taxes and insurance premiums.

Remember, the escrow account you used when closing on your home and this mortgage escrow account are for different purposes, even though they are both savings accounts used to fund necessary expenses.

The mortgage escrow account is constant and ensures your property taxes and insurance are paid on time, while the closing account is short-term and used specifically for buying homes and funding payments for the purchase.

When Are Your Property Taxes Included in Your Mortgage Payments?

Whether your property taxes are part of your mortgage payment typically depends on whether you have an escrow set up with your lender. The lender will use the funds from your escrow account to pay your property tax bill by the due date.

Don’t be worried. It won’t surprise you—your lender will explain this program before you sign for the loan. Details about whether property taxes are part of your mortgage payments will be in your loan documents. Also, expect an initial escrow disclosure statement explaining the monthly payments and how they cover your property taxes and insurance.

When Are Your Property Taxes Not Included in Your Mortgage Payments?

You are unlikely to include property tax payments in your mortgage payments if your lender does not need an escrow account or you don’t want the escrow requirement.

For instance, if you pay a down payment of at least 20%, a lender may let you forgo an escrow account on a conventional loan.

In case your mortgage does not include an escrow or has been paid off, you will pay the amounts directly to your local government and insurance company, respectively.

Pros and Cons of Paying Property Taxes With a Mortgage

Add a little more to your monthly mortgage payments, and it will make it easier for you to pay your property taxes. On the other hand, you may want to handle those payments to control your finances better.

• Pros

Convenience: All you have to do is pay your monthly mortgage payments, and everything else will be taken care of—you don’t even need to worry about your tax due dates. Your property taxes will be paid on time.

Budget

When you pay using your escrow account, your tax budget becomes predictable. You won’t have to worry about large tax and insurance bills.

Fills the Gaps

Sometimes, your property taxes may increase due to a new assessment or other factors. In case your escrow account does not have sufficient funds because of the surge in property taxes, your mortgage services will likely cover the entire bill and prevent late tax payments.

• Cons

Increased Monthly Payments

With the addition of property taxes and insurance to your mortgage, your monthly payments will rise, sometimes making it difficult to manage other expenses and leaving you with less money for unexpected expenses.

Larger Upfront Payment

If your lender sets up your escrow account near the due date on your property taxes, they will require sufficient funds to cover the bill. You may be required to deposit taxes worth multiple months upfront. The further the due date, the smaller the deposit amount.

No Interest

There’s no interest, so the money in the escrow account won’t increase, which cuts down the opportunity for potential earnings. If the lender does not need an escrow account, you might have the chance to save the money in a high-interest savings account or investment account for some extra income before paying the property taxes and insurance.

Conclusion

You cannot avoid taxes. You need to pay them on time to avoid severe consequences. Using your mortgage payment to pay your property taxes is a convenient way to “set it and forget it.” If you keep making your monthly mortgage payments, your lender or loan servicer should ensure paying the taxes using your escrow account.