Do Property Taxes Come Out of a Mortgage? Unveiling the Escrow Enigma

In short: sometimes, but not always. Whether property taxes are included in your mortgage payment depends on whether you have an escrow account (also sometimes called an impound account). Let’s dive into the mechanics of this important aspect of homeownership.

Understanding Escrow Accounts: Your Tax & Insurance Buffer

What is an Escrow Account?

Think of an escrow account as a dedicated savings pot attached to your mortgage. Your lender collects a portion of your estimated property taxes and homeowner’s insurance premiums each month, along with your principal and interest payment. They then hold these funds in escrow and pay the tax bills and insurance premiums directly to the taxing authority and insurance company when they come due. It’s a convenience, and, for many, a mandatory part of their mortgage agreement.

How Does it Work?

When you close on your mortgage, your lender will estimate your annual property taxes and insurance premiums. They’ll divide this total by 12 and add that amount to your monthly mortgage payment. This extra amount goes into your escrow account. Throughout the year, as your property tax bills and insurance premiums come due, your lender pays them directly from the funds in your escrow account.

Why Lenders Require Escrow Accounts

For lenders, escrow accounts mitigate risk. By ensuring property taxes and insurance are paid, they protect their investment. If you fail to pay your property taxes, the government can place a lien on your property, potentially leading to foreclosure. Similarly, if you don’t have homeowner’s insurance and your house is damaged or destroyed, the value of the property as collateral plummets. Requiring an escrow account is a safety net for the lender.

The Alternative: Paying Property Taxes Directly

Not everyone is required to have an escrow account. If you have a substantial down payment (often 20% or more) and a good credit history, your lender might waive the requirement. In this case, you’re responsible for managing and paying your property taxes and homeowner’s insurance premiums yourself.

The Responsibility is Yours

Paying property taxes directly requires discipline and careful budgeting. You’ll need to set aside money each month to cover these expenses when they come due. Missing a property tax payment can lead to penalties, interest charges, and, ultimately, a lien on your property.

Potential Benefits of Paying Directly

• Control over your funds: You have full control over the money earmarked for taxes and insurance.
• Earning interest (potentially): You can keep the money in an interest-bearing account until it’s time to pay. However, any interest earned will likely be minimal and must be factored into your tax planning.
• Flexibility: If you find a cheaper insurance policy, you can switch without involving the lender.

Determining if Your Property Taxes are Included in Your Mortgage

The easiest way to determine if your property taxes are included in your mortgage is to:

• Review your mortgage statement: Look for a line item labeled “Escrow,” “Taxes,” or “Impound Account.” This line will show the amount you’re paying each month towards these expenses.
• Check your loan documents: Your loan agreement will clearly state whether you have an escrow account.
• Contact your lender: If you’re still unsure, call your lender directly. They can quickly confirm whether your property taxes are included in your monthly payment.

Potential Escrow Account Issues and Considerations

Escrow Account Shortages

If your property taxes or insurance premiums increase, your lender might not have enough money in your escrow account to cover the bills. This can lead to an escrow shortage.

• How to handle a shortage: Your lender will typically give you the option to pay the shortage in a lump sum or increase your monthly mortgage payment to cover the shortfall over the next year.
• Why shortages happen: Property tax assessments can rise unexpectedly, or insurance premiums can increase due to market conditions or claims activity in your area.

Escrow Account Overages

Conversely, if your property taxes or insurance premiums decrease, your lender might have too much money in your escrow account. This is called an escrow overage.

• How overages are handled: By law, lenders are often required to refund any overage exceeding a certain threshold (usually $50). The lender will typically conduct an escrow analysis to determine the appropriate amount to refund.

Annual Escrow Analysis

Lenders are required to perform an annual escrow analysis to ensure they are collecting the correct amount of money to cover your property taxes and insurance premiums. This analysis will reveal any shortages or overages and adjust your monthly payments accordingly.

The Right to Waive Escrow (Sometimes)

Even if your lender initially required an escrow account, you might be able to waive it later. Once you’ve built up enough equity in your home (typically 20% or more) and have a strong payment history, you can request to have the escrow requirement removed. However, lenders are not obligated to grant this request, and they may charge a fee to remove the escrow requirement.

FAQs About Property Taxes and Mortgages

Here are some frequently asked questions that shed more light on the interplay between property taxes and mortgages:

1. Are property taxes deductible?

Yes, in many cases, you can deduct your property taxes from your federal income taxes, subject to certain limitations. The Tax Cuts and Jobs Act of 2017 capped the deduction for state and local taxes (SALT), including property taxes, at $10,000 per household. Consult with a tax professional for personalized advice.

2. What happens if I don’t pay my property taxes?

Failure to pay property taxes can lead to serious consequences. The taxing authority can place a lien on your property. If the taxes remain unpaid, the government can eventually foreclose on your property to recover the debt.

3. How are property taxes calculated?

Property taxes are typically calculated based on the assessed value of your property. The assessed value is determined by the local government, and the tax rate is applied to this value to calculate the amount you owe. Assessment methods and tax rates vary by location.

4. Can I appeal my property tax assessment?

Yes, you generally have the right to appeal your property tax assessment if you believe it’s too high. The process for appealing varies by location, but it typically involves submitting evidence to support your claim that the assessed value is inaccurate.

5. How often are property taxes paid?

The frequency of property tax payments varies by location. Some areas require annual payments, while others allow for semi-annual or quarterly payments. Your local taxing authority will provide information on the payment schedule.

6. Is it better to have an escrow account or pay property taxes directly?

The best option depends on your individual circumstances. An escrow account offers convenience and ensures your taxes are paid on time, but it also means you lose control over the funds. Paying directly gives you more control and the potential to earn interest, but it requires discipline and careful budgeting.

7. What is a supplemental property tax bill?

A supplemental property tax bill is a one-time tax bill issued after a change in ownership or a major improvement to your property. It covers the difference between the previous owner’s taxes and the new assessment based on the sale price or the value of the improvements.

8. Can my lender change the amount of my escrow payment?

Yes, your lender can adjust your escrow payment based on changes in your property taxes or insurance premiums. They will typically notify you in advance of any changes and explain the reason for the adjustment.

9. What happens to my escrow account when I pay off my mortgage?

When you pay off your mortgage, your lender will close your escrow account and refund any remaining balance to you. You will then be responsible for paying your property taxes and insurance premiums directly.

10. How can I estimate my property taxes before buying a home?

You can estimate your property taxes by contacting the local taxing authority or using online property tax calculators. These tools typically require information such as the property’s assessed value, the tax rate, and any applicable exemptions.

11. Can I use a credit card to pay my property taxes?

Some jurisdictions allow you to pay your property taxes with a credit card, but they may charge a fee for this service. Consider the fee and the interest rate on your credit card before using this option.

12. Are there any exemptions that can reduce my property taxes?

Many jurisdictions offer property tax exemptions for certain groups, such as seniors, veterans, and homeowners with disabilities. Check with your local taxing authority to see if you qualify for any exemptions. These exemptions can significantly reduce your tax burden.

Understanding whether your property taxes are included in your mortgage and the intricacies of escrow accounts is vital for sound financial planning. By carefully managing your escrow account or taking responsibility for direct payments, you can ensure you meet your obligations as a homeowner and avoid potential financial pitfalls.