Are property taxes included in the mortgage? What to know

If you own a home or are preparing to buy one, be ready to pay property taxes. These taxes are collected by local governments to help cover for necessary community and county services.

This bill can add thousands per year to your mortgage payment. What you will owe depends on your home's value and your jurisdiction's tax rate.

It’s important to know when to expect your property tax bill and how to pay it.

What are property taxes?

Property taxes are local taxes levied on real estate. They're based on your home’s assessed value, minus any exceptions or deductions. A local assessor periodically evaluates your property’s market value, and your property taxes are determined by the current tax rate, which is a percentage of that assessment from which you may or may not be eligible for various deductions.

Your property’s taxable value is revalued on a schedule determined by your jurisdiction and what’s called the “millage rate,” which determines in dollars how much you owe.

“Property taxes provide a steady stream of funding available to communities to meet their needs, and are less volatile than most other taxes or revenue,” explains Nick Heimlich, owner and attorney at Nick Heimlich Law.

City and county governments use this revenue to pay for police and fire services, schools, roads, libraries, and other public infrastructure that keep your community running.

“Property taxes provide a system intended to guarantee that each property owner makes an equitable contribution to the maintenance and enhancement of their communities,” Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College, notes.

How are property taxes paid?

Most local governments bill property taxes once a year, twice a year, quarterly, or at other intervals, which can vary from county to county. The exact due dates will be indicated on the property tax bill.

Many mortgage lenders and loan servicers require that you use an escrow account (more on this next) to have your property taxes paid automatically on your behalf. Or, if allowed, you can pay the taxes yourself online, by mail, or in person at a local tax collection point.

“Whatever the payment path, it’s important to pay your bill on time, because the longer it goes unpaid, the more penalties and interest will accrue,” cautions Heimlich.

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What is an escrow account?

An escrow account provides a convenient way to pay taxes. This is a special account created by your mortgage lender for the purpose of collecting and holding dollars that will be used to pay for property taxes, homeowners insurance, and, if applicable, mortgage insurance, local government fees, homeowners association assessments/fees, and separate flood/hazard insurance.

With an escrow account, your monthly mortgage payment gets split into two components: one part is applied toward your loan’s principal and interest, and the other portion is deposited into your escrow account to pay your property taxes and other non-mortgage bills.

“In this scenario, your lender divides the expected total property tax bill by 12 months to calculate your monthly property tax liability,” says Shirshikov.

Your lender will ensure that all of these bills are paid on time and in full, and once a year they will review your account to make sure you have sufficient funds – adjusting your monthly contribution if a shortfall or surplus is expected.

“An escrow account and escrow payment reduces the lender’s risk, because if property taxes are not paid, a lien can be placed on your property that outranks the mortgage,” says Chad Silver, managing partner of Silver Tax Group.

Can property taxes be paid separately from escrow?

Rest assured that, if your lender allows you to forgo escrow, you can pay your property taxes on your own, without an escrow account. However, to receive an escrow waiver, you’ll need a strong payment history, a low loan-to-value ratio, and a sound credit profile to assure your lender that you can handle property tax payments without their help.

“Most lenders charge a nominal fee to waive escrow and often require that you have more equity in the property,” adds Silver.

If you choose this option, “you would simply pay each tax bill received directly to your taxing authority via check, online, or in person,” says Sean Leo, founder and head of analytics for Riverdale Property Tax Relief.

Pros and cons of including property taxes in your mortgage

Having an escrow account and relying on your lender to automatically pay your property taxes has its pluses and minuses. Here’s a breakdown of these points.

Pros of including property taxes on a mortgage

The benefits of having your lender cover your taxes via escrow payments include:

– Peace of mind that your property taxes will be paid punctually and in full, which avoids penalties, fees, or liens. “Since your lender will manage the timing and adjustments for a year’s worth of tax changes, it can also greatly simplify budgeting,” continues Shirshikov.

– Having to make only one monthly payment instead of separate payments.

– Manageable monthly payments instead of having to make larger lump sum property tax payments annually, semiannually, or quarterly. “It keeps your monthly budget simple since your monthly payment amount should be the same from month to month,” says Leo.

– No lender penalty fee for waiving escrow.

Cons of including property taxes on a mortgage

On the other hand, including property taxes in mortgage payments via escrow can have its drawbacks, among them:

– You’ll have less control over your money and how and when your taxes and homeowners insurance are paid. “You’ll also be tying up cash in an escrow account that could otherwise be invested,” Leo says.

– Your lender may overestimate or underestimate your taxes for the year, charging you more or less than what you actually owe (although they will conduct an annual escrow analysis and, if you were overcharged, they will either refund you or credit your account). “If they underestimate your taxes, that would result in a shortfall in escrow and an unexpected rise in payments the following year,” cautions Shirshikov.

– If your property taxes drop, you may have to wait until the annual escrow analysis for your monthly payment to adjust.

– Some lenders charge fees to maintain an escrow account.

Factors that affect property tax rates

Many different factors can have an impact on your property tax rate, including your home’s value, local government spending plans, and voter-approved initiatives like school levies or infrastructure investments.

The total tax you pay will depend on both your assessed value as well as the millage rate. A property tax millage rate is the amount of tax you will be charged for every $1,000 of your home’s assessed value. One “mill” equates to $1 of tax per $1,000 of value. Case in point: If your property is valued at $200,000 and the millage rate is 25, your property tax bill would be $5,000 for the year.

“Your assessed value, however, is the biggest factor. This is largely driven by comparable home sales in your same school district,” Leo notes. “If home prices are up, typically your assessment will be as well.”

Property taxes in mortgage FAQs

What makes up a monthly mortgage payment?

At minimum, your monthly mortgage payment will include principal and interest on the loan. But if you are required to or opt to have an escrow account, your lender will pay for things like property taxes and homeowners insurance, and (if applicable) items like mortgage insurance, separate flood or hazard insurance, homeowners association fees/assessments, and separate taxes or assessments, on your behalf; if so, your lender will include these charges in your monthly payment (averaging out these bills over 12 months).

What if I miss a property tax payment?

If you miss a property tax payment, you can expect fines and interest penalties on the amount owed. If you continue not to pay, the county can put a tax lien on your property and sell it at a tax auction. If you are financing your home, your mortgage lender may advance funds to cover your delinquent property taxes (thereby adding to your loan balance) and may even foreclose on your property.

How will I know how much my property taxes cost?

Your Loan Estimate from the lender should show a reliable estimate of the home's annual property tax bill. Realtors usually have access to this information. Or you can search the local jurisdiction's tax records or ask the home's seller.

Do property taxes get paid monthly?

Yes, you can pay your property taxes monthly if you have an escrow account with your lender. They can estimate your annual tax bill and divide it by 12 monthly payments that they will make on your behalf. If you don’t have an escrow account, you are responsible for paying your property taxes directly. Typically, this means paying in a lump sum annually, semiannually, or quarterly by the deadlines indicated on your bill, although some localities may offer optional installment plans for monthly payments. When you buy the home, a partial prepayment of property taxes may be charged at closing, along with the loan's other closing costs.

Mortgage lenders can answer property tax questions during pre-approval

It’s good to fully understand mortgage and property tax matters, especially how property taxes are determined, when they are due, and how you can pay. Remember that these taxes cover essential local services and are determined based on your property’s assessed value and local millage rate.

Your lender may require or recommend that you have an escrow account that automatically pays your property taxes for you. Or, you can pay your property tax bills directly to your local taxing authority.

But many borrowers prefer the convenience and reliability of the escrow option, which ensures that taxes get paid punctually and fully. Ask your lender about any questions you have regarding escrow accounts.

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