What are property taxes?
When you become a homeowner, you start paying fees to your state and local governments. These property taxes fund essential services that help your community thrive, such as maintaining schools, roads and public safety. 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 tax rate of 0.32% and Illinois had the highest of 1.83%. Quite the range, right?
How property taxes are calculated
Property taxes aren’t a flat fee; they are determined based on your home’s value and the tax rates where you live. 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, 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 is 1.5%, your annual property tax would net out at $4,500. Don’t forget that property tax rates vary based on where you live.
Annual vs. monthly property tax payments
Do you pay property taxes monthly? That depends on how you choose to pay. You can either take care of property taxes in one lump sum each year or as part of your mortgage payment. For many folks, monthly payments are more manageable and easier to budget.
Are property taxes included in your mortgage?
A lender may include property taxes in your monthly mortgage payment. These taxes are typically pulled from an escrow account, also known as a mortgage impound account, which funds many closing costs. In other cases, you may have the option to pay property taxes directly to the local government. We’ll get into both possibilities.
What is an escrow account?
If you’ve tuned into a real estate show or two, you’re familiar with the phrase “in escrow.” But what does it mean? A property is in escrow once the seller accepts the buyer’s offer. At that point, a third party agent sets up and manages an escrow account to handle funds (like your earnest money deposit) and important documents until all conditions of the sale are met.
This process ensures that the buyer and seller check every box before the property officially changes hands. Not all lenders and loan programs require an escrow account, but some make it mandatory. Once you seal the deal, your mortgage servicer can use the escrow account to cover other fees.
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.
When property taxes are rolled into your mortgage
Property taxes are often rolled into your mortgage through an escrow account. 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, VA and USDA loans. This ensures that your taxes and insurance bill are paid on time and in full.
How lenders use escrow to pay taxes
What about escrow and property taxes? Your mortgage servicer can use your escrow account to cover fees like property taxes and homeowners insurance on your behalf. When you have an escrow account, your monthly mortgage bill is divvied up three ways: some goes to the principal, some covers the interest and some is put into escrow. Think of escrow as a dedicated piggy bank, designed to ensure important bills are paid on time.
Your 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.
Why did my mortgage payment go up?
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 bases. If there’s a shortage, your monthly payment will increase to make up the difference.
When 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.
How to check if your taxes are included
Not sure if you’re 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 you pay property taxes separately?
Loans without escrow accounts
Most lenders prefer to handle property taxes through an escrow account, though you may have the option to pay your local tax authority directly.
Pros and cons of paying taxes directly
Some loans (usually those with higher down payments) may not require an escrow account. In these cases, the homeowner is responsible for paying property taxes directly to the local government.
Comparing ways to pay property taxes
| 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 |
When you might opt out of escrow
Do you prefer to hold the purse strings? If you have a larger down payment and get the okay from your lender, you may be able to pay property taxes directly to the government. Before deciding to forgo an escrow account, be sure to consider the pros and cons. Managing these payments yourself adds more financial responsibility to your plate, but it also gives you more control over your cash flow.
