Are Property Taxes Included in Your Mortgage? Understanding Escrow Accounts

Property taxes are not part of your mortgage loan itself, but lenders often require you to pay them as part of your monthly mortgage payment through an escrow account. This arrangement is mandatory for government-backed loans and conventional loans with less than a 20% down payment. Understanding how this works is crucial for managing your homeownership budget effectively.

What is an Escrow Account?

When you make a monthly mortgage payment, it often includes more than just principal and interest. Lenders frequently bundle property taxes and homeowners insurance into the payment. The extra funds are held in an escrow account—a dedicated holding account managed by your mortgage servicer. The lender then pays these large bills on your behalf when they come due. This system ensures these critical expenses are never missed, which protects the lender’s financial interest in your property.

When is an Escrow Account Required?

You are typically required to have an escrow account under two main conditions:

• Government-Backed Loans: If you have an FHA, VA, or USDA loan.
• Low Down Payment: If your down payment on a conventional loan is less than 20%.

Lenders see this as a way to mitigate risk. By ensuring property taxes and insurance are paid, they prevent tax liens or uninsured damage from devaluing the property that secures the loan.

How Does the Escrow Payment Process Work?

The process is designed to break down a large annual expense into manageable monthly payments.

1. Calculation: Your lender estimates your annual property tax and insurance bills.
2. Division: The total annual cost is divided by 12.
3. Collection: This amount is added to your monthly mortgage payment.
4. Payment: The lender holds the funds in escrow and pays the bills directly to the tax authority and insurance company when they are due.

For example, if your annual property tax is $2,400 and homeowners insurance is $1,200, your lender would add $300 ($200 for taxes + $100 for insurance) to each monthly mortgage payment. This spares you from having to budget for two large lump-sum payments each year. Your lender is required to provide you with an annual escrow statement detailing all activity in the account.

Can You Opt Out of an Escrow Account?

In some cases, yes. This is known as an escrow waiver. For conventional loans, lenders may grant a waiver if you meet specific criteria, which often include:

• A loan-to-value ratio (LTV) of 80% or less (meaning you have at least 20% equity).
• A strong payment history with no late payments in the last 12-24 months.
• A good credit score, often 660 or higher.
• Paying a one-time escrow waiver fee.

It's important to note that FHA and USDA loans do not permit escrow waivers. While the VA allows them, individual VA lenders often have their own strict requirements.

What Happens After You Pay Off Your Mortgage?

Once your mortgage is fully repaid, the escrow account is closed. You will then be responsible for paying your property taxes and homeowners insurance directly. You should proactively contact your local county tax assessor and your insurance provider to set up direct billing. You can then choose to pay these bills annually, semi-annually, or, in some municipalities, in monthly or quarterly installments.

Managing property taxes through an escrow account simplifies budgeting for many homeowners by spreading costs evenly throughout the year. Whether your loan requires it or not, this system provides a structured way to meet essential financial obligations of homeownership.