What are property taxes?
In many cases, property taxes are included in your monthly mortgage payment, but not always. Whether you’re buying a home or reviewing your current bill, it’s important to know what’s bundled together. Keep reading to learn how property taxes work, when lenders include them in mortgage payments and how to check what’s included in your monthly payment
When you become a homeowner, you start paying fees known as property taxes to your state and local governments. Property taxes fund essential services that help your community thrive, such as maintaining schools, roads and public safety.
How are property taxes calculated?
Property taxes aren’t a flat fee. They're determined based on your home’s value and the tax rates where you live. The amount you pay in property taxes can vary greatly from state to state, and even county by county. To put things in perspective, in 2023, Hawaii had the lowest effective tax rate of 0.32% and Illinois had the highest of 1.83%. Quite the range, right?
After assessing your property value and baseline tax rates in the area, the local government will assign a tax rate to your home. You can use our mortgage calculator and property tax estimate to get a feel for your monthly mortgage breakdown. Keep in mind that rates can vary each year due to local tax assessments and any changes in your property’s value.
Property taxes in action
If your home is valued at $300,000 and the tax rate where you live is 1.5%, your annual property tax would net out at $4,500.
Are property taxes included in mortgage payments?
The lender may include property taxes in your monthly mortgage payment, but that isn’t always the case. Let’s take a look at both methods.
Paying property taxes monthly with your mortgage
When property taxes are rolled into your mortgage, lenders typically collect the money through an escrow account, then pay the bill for you when it's due. To determine how much money to put into escrow for taxes, the lender will usually estimate your annual property tax and homeowners insurance costs, then divide it by 12 to determine the monthly amount. This cost is added to your principal and interest fees, resulting in a single, predictable mortgage payment each month.
In some states, an escrow account is called an impound account. Not all lenders and loan programs require an escrow account, but some make it mandatory. If you have a conventional mortgage, most lenders require an escrow account, especially if your down payment is less than 20%. Many government-backed loans also require escrow accounts, including FHA and VA loans. This ensures that your taxes and insurance bill are paid on time and in full.
Pro Tip
If you’re financially savvy and your lender doesn’t require an escrow account, you may choose a “DIY” solution. Instead of using an escrow account, you can set up your own interest-earning account to hold your property tax and homeowners insurance funds.
Can you pay property taxes separately?
Some home loans (usually those with higher down payments) may not require an escrow account. When escrow isn’t required, you’re responsible for paying property taxes on your own and making sure payments are submitted on time and in full. Managing these payments yourself adds more financial responsibility to your plate, but it also helps to give you more control over your cash flow.
Paying property taxes directly vs. with escrow
| Feature | Paying with escrow | Paying taxes directly |
|---|---|---|
Convenience | Automatically handled by mortgage servicer | You are responsible for making tax payments on time and in full |
Financial flexibility | Payments are fixed and automatically included in your monthly payment | Depending on your location, you may be able to control when to submit payments and choose to pay in one annual lump sum or more frequently. |
Risk of late payments | Mortgage servicer handles timely payments, reducing risk of penalties or liens for late bills | Failure to pay on time can result in penalties, additional interest or even a tax lien |
Escrow fees | Servicers may charge fees for managing the escrow account | No additional fees for managing your own payments |
How to check if your taxes are included in your mortgage
Not sure if your taxes are folded into your mortgage payments? We’ll help you investigate.
- Look at your monthly mortgage statement: Your monthly statement should have a line item for escrow. If you see a breakdown that includes taxes, then they are indeed included in your payment.
- Ask your lender about escrow: Don’t be shy—give your lender or mortgage servicer a call. They can offer a detailed breakdown of your mortgage payment and confirm whether taxes are included.
- Check your closing disclosure or loan estimate: Hopefully, you’ve kept your closing disclosure safe and sound. It’s an important document for your records and should clearly state whether property taxes are part of the mortgage.
Can property taxes make your mortgage payment go up?
Sometimes. If you look at your mortgage bill and wonder “Why did my mortgage go up?” a few factors could be at play.
- Property tax reassessment: Local governments periodically reassess property values. Sometimes, your home value increases due to market conditions or home improvements, pulling your property taxes higher.
- Escrow shortage or recalculation: Each year, your lender performs an escrow analysis to ensure there’s enough money in the account to cover your property taxes and other expenses, such as homeowners insurance. If there’s a shortage, your monthly payment will increase to make up the difference.
- Taxes increase after home purchase: In some cases, property taxes increase after you buy a home, especially if the previous owner was eligible for a tax exemption. As a result, you may owe a higher mortgage payment.
