Is Property Tax Included In Your Mortgage Payment?

As you plan for homeownership, it's essential to understand what’s included in your monthly mortgage payment. Many homeowners are surprised to find that it’s more than just principal and interest — additional expenses like property taxes and homeowners insurance are also often included. These costs are typically managed through an escrow account set up by your lender, helping cover essential protections and local tax obligations.

Here’s a quick breakdown of what’s likely in your mortgage payment:

• Principal: The amount that goes toward repaying the loan balance.
• Interest: The cost paid to the lender for borrowing the funds.
• Property taxes: Taxes collected by local governments to fund community services.
• Homeowners insurance: Coverage to protect your property and assets against damage or loss.

Knowing each of these components can help you better manage your budget and avoid surprises in your monthly expenses.

Understanding Escrow Accounts

When you apply for a mortgage preapproval, you and your lender will estimate your monthly payment, including the principal and interest, and also the estimated monthly escrow payment (which goes toward property taxes and homeowners insurance) based on a typical home in the area where you’re looking to buy.

You should know that this estimate is just that – an estimate. It could be based on how much the previous owner paid in taxes and insurance or on what taxes in the area typically run. The true tax total won’t be determined until you decide on the house you want, and insurance won’t be calculated until you’ve chosen a company and the right policy for you.

Can You Pay Property Tax Separately From Escrow?

If you choose not to use an escrow account for property taxes, you’ll be responsible for making those payments directly to your local tax authority. This means you’ll need to keep track of payment deadlines, which vary by location — some municipalities require annual payments, while others may bill semi-annually or quarterly. To avoid missed payments and potential late fees, many homeowners set up reminders or automate payments if their local tax authority allows.

Paying property taxes separately can provide a sense of control over your finances, but it also presents challenges. Without the monthly escrow contributions, you’ll need to budget carefully to ensure you have the full amount ready when the bill comes due. This approach requires discipline, as missing or delaying payments can lead to penalties or, in extreme cases, a lien on your property.

How Does Property Tax Affect Your Mortgage?

Property taxes are typically included in your overall monthly mortgage payment if you use an escrow account, where your lender collects a portion each month to cover annual property tax bills. For those paying via escrow, any increase in property taxes will result in a higher monthly payment, as your lender adjusts to meet the new tax amount. This can impact monthly budgeting, though it ensures payments are made on time.

If you pay property taxes separately, fluctuations don’t affect your monthly mortgage payment. However, you’ll need to budget accordingly to cover any tax increases yourself, as you’ll be responsible for paying the full amount directly to your tax authority when due. This can require more proactive financial planning but provides greater control over the timing of your tax payments.

What Other Expenses Are Included in Your Monthly Payment?

Homeowners insurance, along with other property-related costs, can significantly impact your monthly mortgage payment. When estimating these expenses, lenders often rely on average rates based on your area’s ZIP code and homes nearby. However, your actual insurance cost depends on the specific policy you choose, including the level of coverage, deductible amount, and the insurance provider itself. If you bundle homeowners insurance with other policies, like auto insurance, you might qualify for a discount that lowers your overall cost.

Choosing the right insurance policy and understanding how it affects your monthly payment can be complex. Being aware of these variables and the potential for adjustments can make the process smoother and help you better anticipate changes to your monthly budget.

Pros And Cons Of Including Property Tax In Your Monthly Payments

Including your property taxes in your monthly mortgage payment offers both advantages and potential drawbacks, depending on your financial preferences and planning style.

Advantages

• Convenience: Bundling property taxes with your mortgage means fewer bills to manage, as your lender handles the payments on your behalf.
• Budgeting help: Monthly contributions to an escrow account can make it easier to budget by spreading the tax cost over the year instead of paying a lump sum.
• On-time payments: Automatic payments via escrow reduce the risk of missed deadlines, which could otherwise lead to penalties.

Drawbacks

• Variable monthly payments: If property taxes increase, your monthly mortgage payment will also rise, which can make it harder to budget.
• Loss of control: Paying through escrow means relying on your lender to manage payments accurately, and some prefer handling property tax payments directly for greater control.

Can Property Taxes Increase?

A property’s assessment is meant to reflect its current market value, with property taxes based on that assessed amount. Fluctuations in market conditions, home improvements, or local tax requirements can cause these values to rise or fall — renovations or rising market values may lead to higher taxes, while economic downturns can reduce them. Tax rates also vary by location to fund local services, meaning rates may increase if more funds are needed.

If you pay property taxes through an escrow account, changes in taxes will affect your monthly mortgage payment. It’s also important to note that tax rates can vary based on property use — a primary residence may qualify for a homestead exemption, but second homes or rentals typically do not.

How To Pay Property Taxes When Your Mortgage Is Paid Off

Once you’ve paid off your mortgage, your responsibility to pay property taxes doesn’t go away. Instead of being bundled into your monthly mortgage payment, you’ll now pay these taxes directly to your local tax authority. This means you’ll need to keep track of payment schedules, which can vary based on your location — some areas require annual payments, while others may have semi-annual or quarterly schedules.

It’s crucial to plan for these payments, as property taxes are still required even without a mortgage. Missing payments can result in late fees or, in severe cases, a lien against your property. Many homeowners find it helpful to set aside funds each month in a savings account to cover these taxes, essentially creating their version of an escrow to ensure they’re financially prepared when tax bills arrive.

The Bottom Line

As you move forward in the homeownership journey, keep in mind how factors like property taxes, homeowners insurance, and even local tax changes can impact your monthly payment. Understanding each element, especially if you’re using an escrow account, will help you budget with confidence and avoid surprises down the line. If you’re ready to take the next step, start the mortgage approval process with Rocket Mortgage® for a personalized plan that fits your financial goals.