Are property taxes included in a mortgage?

If you’re buying a home for the first time, it’s normal to wonder what costs will be included in your monthly payment. Understanding what gets included in your mortgage payment is one of the things you should focus on so that you can anticipate your costs and make sure a home is affordable.

Your monthly mortgage payment will include interest and a portion of your loan principal but will often include some other costs, including property tax or homeowners' insurance premiums. The money for these costs is held in escrow, and your lender distributes the money as needed when bills come due.

We’ll break down how escrow accounts work and how the mortgage companies handle property tax payments.

Understanding escrow accounts

When you apply for a mortgage pre-approval, your lender will usually provide you with a document outlining the loan you can qualify for and the estimated monthly payment. That estimate includes your principal and interest payment, as well as any escrow payments you have to make.

An escrow account is a separate account that is often set up by your lender. The lender includes certain costs, such as property taxes or homeowners insurance, in your monthly mortgage payment. It then places the money dedicated to those costs in the escrow account. When your property tax bill comes due, the lender handles payment on your behalf using funds from the escrow account.

Keep in mind that the estimate is just that. The actual numbers may differ depending on how much you borrow, whether your local government reassesses property values, property tax rates change, or many other factors. Your insurance rate will also vary depending on the home you buy and will usually only be set once you’re moving forward in the process of buying a specific home.

Can you pay property tax separately from escrow?

Yes, you may have the option to handle property taxes on your own rather than having them paid by your lender through an escrow account. However, you’ll have to check with your lender, as not all lenders will permit you to handle property taxes on your own.

Paying property taxes without using an escrow account requires financial responsibility. Typically, property tax bills come only once every three months rather than monthly. You have to plan and set money aside for property taxes. In some high-cost areas, bills can be quite hefty, and it could be easy to get surprised by a higher-than-expected bill.

If you fail to pay your taxes, the local government could fine you or even place a lien on your home.

The benefit of not paying property taxes through escrow is that you keep the money for longer rather than letting the bank hang on to a portion of your payments for months at a time. You can use the funds to earn interest while you wait for the bill to come due.

What other expenses may be included in your monthly payment?

Your monthly mortgage payment is made up of many different things. Generally, the only ones that are fixed are the payments toward principal and interest, unless you have a variable interest rate. Other factors that influence your payment can change over time.

Some common expenses that are included in mortgage payments include:

• Property taxes
• Homeowners insurance
• Other insurance policies, like flood insurance
• HOA fees
• Mortgage insurance

Some of these factors are out of your control. For example, your property taxes are reliant on your home’s value and the tax rate where you live.

Others, you can control to a degree, such as by shopping around for the best deal on homeowners insurance or accepting a higher deductible in exchange for a lower insurance premium. You may factor the potential cost of insurance into your home search, passing over homes that have higher risk levels, such as those with pools or in-ground trampolines, which can lead to higher premiums.

Pros and cons of including property tax in your monthly payments

Paying for property tax with your monthly mortgage payment is common. It means you don’t have to worry about handling payments because your lender takes care of it automatically. However, there are also downsides to keep in mind.

How to pay property taxes when your mortgage is paid off

When you pay off your mortgage, it’s a very exciting time. You won’t be getting a mortgage bill from your lender anymore, freeing up a huge amount of money in your budget.

It also means that your lender won’t hold property tax payments in escrow or pay the taxes on your behalf. You have to take full responsibility for paying property taxes.

Generally, property tax payments are due twice yearly in the spring and fall, but you can usually opt to pay the full amount for the year in one payment. This can vary since the specific payment cycle is determined by the local government. It’s important to make a financial plan and set money aside so you have cash on hand to pay the bill.

You could consider opening another checking or savings account of your own to serve as a sort of escrow account and then make monthly transfers to the account so that you have the cash ready to go when the property tax bill comes due.

The bottom line: Properties taxes are not always included in the mortgage payment

Most homeowners let their lender set up an escrow account and include property tax payments in their monthly loan payment, but this isn’t true of every mortgage, and you’ll have to take over responsibility for the tax payment once you pay off the loan.

If you pay off your loan or opt out of escrow, it’s important to have a plan for handling property taxes and to set money aside each month so that you have it ready when you get your tax bill. Keep in mind that taxes can change over time, so you’ll need to adjust the amount you save for taxes over time.

If you’re ready to see what you may qualify for, you can start your application with Rocket Mortgage¹ and reach out to a Home Loan Expert who can answer your questions about escrow funds and payments.

¹ Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.