Are Property Taxes Included In Mortgage Payments?
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Summary:
As it’s crucial for lenders that you pay your property taxes, they will generally include a portion of these taxes in your monthly mortgage payment, along with principal, interest, and insurance. The taxes and homeowners insurance will be placed in an escrow account and paid from there. However, in some cases, people choose to pay their property taxes separately. Either way, property taxes can be a significant addition to the cost of a home that you will need to factor in when you determine what you can afford.
Americans have been grumbling about having to pay their property taxes going all the way back to the Fries Rebellion in 1798 when Pennsylvania Dutch settlers led a revolt against the U.S. government. Unfortunately, their property taxes stayed, and even today, if you have a mortgage you will most likely have to pay property taxes. Sometimes it is possible to pay them directly to your municipality in a lump sum each year (or divided into multiple payments). But often lenders require you to pay your yearly tax bill over 12 monthly payments that are added to your mortgage. This money will go into an escrow account so that the property tax bill can be paid in full when it comes due.
The amount you pay for property tax will be based on the assessed value of your home rather than the market value, which can be a little confusing. We’ll explain it for you below.
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What is property tax?
The government levies property taxes to pay for local services based on a percentage of the assessed value of your home. The keyword here is “assessed.” The government doesn’t base the value on what you paid for the home or what Zillow thinks it’s worth. They will assess the value of the property based on their own metrics. Property tax can also only be levied on what is deemed “real property.” Real property includes land, houses, condos, co-op apartments, and various other fixed buildings.
Who is property tax paid to?
In the past, when the U.S. was small, the federal government would implement and collect property tax, hence the Fries Rebellion. These days, property taxes are collected by the municipality, county, or school district that you live in.
Are property taxes included in mortgage payments?
Sometimes they are and sometimes they aren’t. Your lender may require you to include property taxes in your monthly payment or you may be able to pay them separately.
Escrow account
If you opt to use an escrow account to pay your property taxes, then a portion of your property taxes will be added to your monthly mortgage bill. (You may be required by your lender or even by law to do so). That money will then go into your escrow account, where it sits until the property tax bill is due. The bill will be paid with an escrow disbursement, so you don’t have to worry about paying it.
Pro Tip
If you use an escrow account, your mortgage bill will probably include the loan principal, loan interest, taxes, and insurance. Lenders use the acronym PITI to describe these four items because they want to make sure you can afford to pay all of them when you get a loan. Be sure to estimate all of these expenses when you’re budgeting for a new house.
Pay the taxes separately
If you don’t use an escrow account, you will have to be responsible for paying the property tax bill on your own. Ron Resha, a real estate agent at Coldwell Banker, says that if you made a large down payment, then sometimes your lender’s mortgage escrow requirement will be waived. “In some cases, depending upon your lender, with 20% down or more you can be given an escrow waiver option which would allow you to pay your taxes and insurance on your own, thus not including them in your monthly payment.”
Depending upon your lender, with 20% down or more you can be given an escrow waiver option which would allow you to pay your taxes and insurance on your own, thus not including them in your monthly payment. - Ron ReshaClick to Tweet
Pro Tip
You have the option of paying your bill directly to the tax office, either in a lump sum or in increments. These increments can be divvied up monthly, quarterly, bi-annually, or whatever way is best for you and the taxman. Some places will even offer discounts if you decide to pay a couple of years upfront. Check with your local tax office to learn about your options.
Why your lender wants you to pay your property taxes
A mortgage lender wants to make sure that you pay your property tax, probably more than any other fee. Why? It has to do with who has the first lien on your property should you run into trouble and not be able to pay your property tax. In most cases, the lender or loan servicer wants to have a first lien on the asset. This means that they get the first opportunity to take your house should you fail to pay them. With property tax, the government will have a first lien if you fail to pay your property tax. As lenders are paranoid about this, they may require that the property tax is paid along with the monthly mortgage payments.
How your lender calculates your payment
Property tax is calculated on an annual basis as a percentage of the assessed value of the property. This means that every 12 months, you are due to pay another property tax payment. If you pay this through escrow, the lender takes the annual payment, divvies it up into 12 parts, and attaches it to your monthly mortgage bill.
Example: Mario’s property tax for 2022
Mario has a $150,000 assessed value on his property, with a tax payment of .6% due.
| Mario’s assessed value in 2022 | $150,000 |
|---|---|
| Property taxes due | $900 |
| Divided into 12 monthly payments | $75 |
| Mortgage payment without property tax | $500 |
| Mortgage payment with property tax | $575 |
You can see that Mario’s yearly tax payment on the assessed value of his home is $900. This $900 is then split up into 12 months and is attached to the monthly mortgage payment. The result is a monthly mortgage payment of $575 vs. $500.
Property tax rates can vary a lot
Depending on where you live, you might pay a much higher property tax rate. Below is a breakdown of property tax rates by state across the U.S.
You can see there is a correlation between some of the wealthiest and most expensive places to live and the property tax.
How property taxes are calculated: assessed value vs. market value
Property taxes are not paid based on whatever your property is worth, as told to you by a real estate agent. Instead, property taxes are based on the assessed value of the property. This means that the county or municipality determines the value of the property based on its own metrics.
As a rule of thumb, the assessed value almost always lags behind the market value of the property. This can be both good and bad. In the case of a market that is growing exponentially, the assessed value of the property will, in many cases, be lower than the actual value. In the case of a falling market, the assessed value can be higher than the property’s actual market value.
A scenario in which the property owner wins
Let’s take the example of Mario, who purchased his property for $100,000 in 2016, and he just got an offer from a real estate agent who said he could easily sell his property now for $200,000. Property tax in the area is .6%.
| Mario’s purchase price in 2016 | $100,000 |
| Market value of Mario’s house in 2022 | $200,000 |
| Property tax at .6% | $1,200 |
| Assessed value in 2022 | $150,000 |
| Property tax on assessed value | $900 |
| Mario saves | $300 |
You can see that as the county only assessed his property at $150,000, he is able to pay .06% on the assessed value, saving him money. In fact, he is able to save $300 or 25% of his property tax bill by getting a lower assessed value than the market value.
A scenario in which the property owner loses
In this scenario, Mario bought his house in 2007 for $150,000. However, by 2010, the market had fallen significantly, and now, the property is only worth $100,000, based on what people will pay for it. However, the county is lagging in its records and doesn’t take into account the drastic drop in prices. In this case, Mario is punished for the lag in assessed value rather than rewarded for it.
| Mario’s purchase price in 2007 | $150,000 |
| Market value of Mario’s house in 2010 | $100,000 |
| Property tax at .6% | $600 |
| Assessed value in 2022 | $150,000 |
| Property tax on the assessed value | $900 |
| Mario loses | $300 |
He now has to pay $300 more than what he would pay if taxes were based on the market value.
Pro Tip
Remember that you can track assessed value through public county records. There are several online sites that will help you track previous property assessments on a home you are looking to buy. You can view a number of years and see how much the property tax correlates to the actual market value over time.
What if you pay off your house?
If you pay off your house, you no longer have to make monthly mortgage payments to your lender or to your escrow account. But you still have to pay your property taxes each year. So what do you do? It’s pretty easy to take over the payments for your property taxes. Just follow these steps:
1. Find your local tax office. Just search online for your “city-municipality name + “where to pay property taxes.”
2. Find out how to pay: online, by check or money order, etc., and how many times a year you need to make a payment.
3. Pay your tax bill. Set a reminder so you don’t forget!
If you’re struggling to pay your tax bills, these companies that specialize in tax relief can help.
If you’re struggling to pay your tax bills, these companies that specialize in tax relief can help.
FAQ
What is it called when taxes are included in a mortgage?
It’s called escrow. When your taxes are included in your monthly bill, the money goes into an escrow account. Money for your our homeowners insurance usually goes into this account as well. Then the bills are paid from this account.
What is all included in a total monthly mortgage payment?
There are four main items you are likely to see included in a monthly mortgage payment: the loan principal, loan interest, property tax, and homeowners insurance. Sometimes this combo is referred to by the acronym PITI.
Is it better to include taxes and insurance in a mortgage?
It’s better for the mortgage lender as it’s extra insurance that you will pay them via the escrow account you set up. In terms of your own personal situation, regardless of if you pay it yourself at the tax office or via your mortgage, the amount will not change. But if you use escrow, you won’t have to remember to pay the bill by the due date, as it’s done for you.
Is my home insurance included in my mortgage?
Not always, but most of the time when you use an escrow account, homeowners insurance is included along with mortgage insurance in your monthly mortgage payments.
Key takeaways
- As it’s crucial for lenders that you pay your property taxes, they will often require that property taxes are combined with your monthly mortgage payment, along with the loan principal, interest, and insurance.
- If your lender does not require that property taxes be wrapped up into mortgage payments, you can pay them separately.
- Property taxes are collected by the county or municipality where you live and rates can vary depending on your location.
- The assessed value of your property does not always correspond to the market value of your property. This can be good or bad for your property tax bill, depending on the state or trajectory of the market.
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