For many homeowners, understanding how property taxes are handled can be confusing especially when it comes to the concept of escrow. If you have a mortgage on your home, there’s a good chance you’ve heard the term escrow account mentioned during your loan process. One of the most common questions borrowers have is whether property taxes are included in escrow. The short answer is: often, yes. But the full picture involves understanding how escrow works, why lenders use it, and what it means for you as a homeowner.
What Is an Escrow Account?
Basic Definition of Escrow
An escrow account is a special financial account set up by your mortgage lender to hold funds for certain recurring expenses related to your property. These expenses typically include property taxes and homeowners insurance. The lender collects money for these costs as part of your monthly mortgage payment, then pays the bills on your behalf when they are due.
Purpose of Escrow
The main purpose of an escrow account is to ensure that important bills tied to your homeownership are paid on time. From the lender’s perspective, it protects their investment in your property by making sure taxes and insurance don’t fall behind. For homeowners, it simplifies budgeting by spreading out large annual expenses over 12 monthly payments.
- Ensures timely payment of property taxes
- Prevents tax liens or penalties
- Maintains active insurance coverage
- Makes budgeting easier with fixed monthly payments
How Property Taxes Are Handled in Escrow
Monthly Contributions
When your mortgage includes an escrow account, your lender calculates how much you need to contribute monthly for property taxes. They estimate the total annual amount due for taxes and divide it by 12. This amount is then added to your mortgage payment.
Annual Review and Adjustments
Escrow accounts are typically reviewed once a year. If property taxes increase or decrease, your monthly escrow contributions may be adjusted. This could lead to a higher or lower total mortgage payment depending on the changes.
Disbursement of Funds
When the property tax bill comes due usually once or twice a year the lender uses the funds in your escrow account to pay it directly to the local tax authority. You don’t have to worry about sending a separate payment unless you choose not to escrow.
Is Escrowing Property Taxes Mandatory?
Depends on the Lender and Loan Type
Whether you are required to escrow your property taxes often depends on your lender and the type of mortgage loan you have. Government-backed loans like FHA and USDA typically require escrow accounts. Conventional loans may offer more flexibility depending on your down payment and credit profile.
- FHA and VA loans: Escrow is usually required
- Conventional loans: May be optional with at least 20% down
- Jumbo loans: Lender-specific requirements
Opting Out of Escrow
If you qualify, some lenders may allow you to waive the escrow account. This means you would pay your property taxes and insurance premiums directly. However, this option usually requires a significant down payment and strong credit history. Some lenders may also charge a fee for waiving escrow.
Benefits of Including Property Taxes in Escrow
Simplified Budgeting
One of the biggest advantages of having property taxes in escrow is the convenience it provides. Rather than having to come up with a large lump sum once or twice a year, you pay a small portion monthly.
Protection from Missed Payments
By letting your lender manage property tax payments, you reduce the risk of missing a deadline or incurring late fees. This also protects you from the possibility of a tax lien on your home due to nonpayment.
Peace of Mind
Knowing that your taxes are being paid on time by your lender can bring peace of mind. It’s one less bill to worry about and one more aspect of homeownership that’s managed automatically.
Drawbacks of Escrow Accounts
Higher Monthly Payments
Since your escrow contributions are bundled into your mortgage, your monthly payment will be higher compared to just paying principal and interest. This can be a concern for homeowners with tight budgets.
Escrow Surpluses and Shortages
Escrow amounts are based on estimates. If your property taxes go up unexpectedly, your account may fall short, and you might have to make up the difference or face an increase in your monthly payment. Conversely, if you overpay, you may get a refund or credit.
Less Control
When your lender pays your taxes and insurance, you don’t have direct control over the timing. While this is rarely a problem, some homeowners prefer to manage these expenses themselves for greater flexibility.
Understanding Escrow Analysis
What Is Escrow Analysis?
Each year, your lender performs an escrow analysis to review whether your monthly escrow payments are sufficient to cover projected property taxes and insurance premiums. Based on the analysis, they will notify you of any changes.
Outcomes of Escrow Analysis
- Surplus: You may receive a refund if more money was collected than necessary.
- Shortage: You may be asked to pay the shortfall in a lump sum or spread it out over the coming year.
How to Check If Your Property Taxes Are in Escrow
Review Your Mortgage Statement
Your monthly mortgage statement should list the breakdown of your payment. Look for a section showing amounts allocated toward escrow, including property taxes and insurance.
Ask Your Lender
If you’re unsure, you can always contact your mortgage servicer directly to confirm whether your property taxes are being paid through escrow. They can provide you with escrow account details and payment schedules.
Making Changes to Your Escrow Arrangement
Can You Add Escrow Later?
If you opted out of escrow when you originated your loan, it may still be possible to add it later. This can be helpful if managing tax payments becomes difficult over time. Contact your lender to see if adding escrow is an option.
Refinancing and Escrow
When refinancing your mortgage, your new lender will likely set up a new escrow account. This gives you another opportunity to evaluate whether you want your property taxes included or paid separately.
Yes, property taxes are often included in escrow especially when you have a mortgage. This arrangement simplifies budgeting, ensures timely payments, and protects both you and your lender from the financial risk of unpaid taxes. While there are pros and cons to having property taxes in escrow, the system is designed to make homeownership more manageable. Whether you’re buying your first home, refinancing, or simply reviewing your mortgage terms, understanding how escrow works is a key part of managing your financial responsibilities as a homeowner.