Yes, in most cases, mortgage companies do pay property taxes on behalf of homeowners through what’s called an escrow account.
This system works by collecting a portion of your property tax amount with each monthly mortgage payment. The mortgage company then handles making the actual property tax payments to your local tax authority when they come due. This arrangement is standard practice for many mortgages in the United States and serves as a protection mechanism for both homeowners and lenders.
While this setup provides convenience for homeowners by automating tax payments, there are specific situations where you might pay property taxes directly. Understanding how escrow accounts work and when they’re required can help you make better financial decisions about your mortgage and home ownership expenses.
Understanding Escrow Accounts and Property Tax Collection
What is an Escrow Account?
An escrow account is essentially a holding account that your mortgage company maintains on your behalf. It’s designed to collect and hold funds for specific home-related expenses that are separate from your principal and interest payments. Think of it as a specialized savings account attached to your mortgage that helps you budget for major housing expenses throughout the year.
When you make your monthly mortgage payment, a portion goes toward principal and interest on your loan, and another portion goes into your escrow account. The mortgage company calculates how much to collect monthly by estimating your annual property tax bill and other escrowed expenses, then dividing by 12 to determine your monthly contribution.
The Real Estate Settlement Procedures Act (RESPA) provides legal guidelines for how mortgage companies must handle escrow accounts. These regulations limit how much lenders can collect and hold in escrow and require annual account analyses to ensure you’re not paying too much or too little.
What Expenses Are Included in Escrow?
While property taxes are the primary focus of this discussion, escrow accounts typically hold funds for several housing-related expenses:
- Property taxes: Annual or semi-annual taxes assessed by your local government based on your property’s value
- Homeowners insurance: Annual premiums that protect your home against damage and liability
- Private mortgage insurance (PMI): Required for conventional loans with less than 20% down payment
- Flood insurance: Mandatory in designated flood zones
- HOA fees: In some cases, though these are less commonly escrowed than the other items
The inclusion of these items in your escrow account helps ensure that these critical expenses are paid on time, protecting both your investment and the lender’s security interest in your property.
How Mortgage Companies Handle Property Tax Payments
The Collection Process
The process of collecting and paying property taxes through your mortgage company follows a predictable cycle:
First, your mortgage lender estimates your annual property tax bill based on previous tax assessments or, for new purchases, the anticipated tax amount. This estimate, divided by 12, becomes part of your monthly mortgage payment.
By law, mortgage companies are allowed to maintain a “cushion” in your escrow account – typically equal to two months’ worth of escrow payments – to cover any unexpected increases in tax rates or insurance premiums.
Once a year, your mortgage company performs an escrow analysis, comparing the actual expenses paid from your account against what was collected. If they collected too much (creating a surplus), they must refund any amount over $50. If they didn’t collect enough (creating a shortage), they’ll either increase your monthly payment or give you the option to pay the difference as a lump sum.
The timing of actual tax payments depends on your local tax authority’s schedule. In many counties, property taxes are due annually or semi-annually. Your mortgage company keeps track of these schedules and submits payments on your behalf before the due dates.
Mortgage Company Responsibilities
Your mortgage company has several key responsibilities regarding property tax payments:
- They must pay your property taxes on time to avoid late fees or penalties. If your mortgage company fails to make timely payments, resulting in penalties, those penalties are generally their responsibility, not yours.
- They’re required to manage your escrow account balance appropriately, not collecting excessive funds beyond what’s legally permitted.
- At least once a year, they must provide you with an escrow statement that details all the transactions in your account, including deposits you’ve made and payments they’ve disbursed on your behalf.
If there’s a significant change in your property tax assessment, your mortgage company should adjust your escrow collection accordingly, though sometimes there’s a lag between tax increases and escrow adjustments.
When Mortgage Companies Are Required to Pay Property Taxes
Legal Requirements
Whether your mortgage company pays your property taxes depends on several factors, including legal requirements and your specific loan terms.
Under RESPA guidelines, lenders have the right to require escrow accounts for property taxes and insurance on most types of loans. However, the specific requirements vary based on:
- Loan type: Different loan programs have different escrow requirements:
- FHA loans always require escrow accounts for property taxes and insurance
- VA loans typically require escrow accounts
- USDA loans mandate escrow accounts
- Conventional loans have more flexibility, with escrow requirements often tied to down payment size
- State regulations: Some states have laws that affect when escrow accounts can be required or waived. For example, California has laws limiting when lenders can mandate escrow accounts.
Loan-to-Value Ratio Thresholds
The loan-to-value (LTV) ratio – the percentage of your home’s value that you’re borrowing – is often the determining factor for escrow requirements on conventional loans:
- Loans with LTV ratios above 80% (meaning less than 20% down payment) almost always require escrow accounts
- Loans between 70-80% LTV often give borrowers the option to waive escrow, sometimes with a fee
- Loans below 70% LTV (30% or more down payment) are more likely to allow escrow waivers without fees
Jumbo loans, which exceed conforming loan limits, sometimes have different escrow requirements. Because these loans are non-conforming, lenders have more flexibility in their terms. Some jumbo loan lenders are more willing to waive escrow requirements, while others maintain strict escrow policies regardless of loan size.
Exceptions: When You Pay Property Taxes Directly
Scenarios Where Homeowners Pay Directly
While mortgage companies typically handle property tax payments, there are several situations where you’ll pay your property taxes directly to your local tax authority:
- Loans without escrow accounts: If you’ve qualified for and chosen to waive escrow, you’ll be responsible for making tax payments yourself.
- Paid-off mortgages: Once your mortgage is fully paid off, you’ll need to take over all property tax payments directly.
- Owner-financed properties: When a property seller finances your purchase (rather than a traditional lender), escrow accounts are less common, and you’ll likely pay taxes directly.
- Investment properties: Some lenders handle investment property loans differently than primary residences, sometimes not requiring escrow accounts for taxes and insurance.
- Cash purchases: If you bought your home without a mortgage, you’ll pay property taxes directly to your local tax authority.
In these scenarios, you’ll receive tax bills directly from your local tax authority, and you’ll need to budget for these expenses on your own.
Waiving Escrow Requirements
If you prefer to handle property tax payments yourself, you might be able to waive the escrow requirement under certain conditions:
- Down payment threshold: Typically, you’ll need at least 20% down payment to be considered for an escrow waiver.
- Credit score requirements: Lenders often require excellent credit (usually 720+) to approve escrow waivers.
- Mortgage history: A proven track record of on-time mortgage payments can help your case.
- Waiver fees: Many lenders charge a fee to waive escrow requirements – often 0.25% of the loan amount or a flat fee between $250-$500.
- Loan type restrictions: Government-backed loans (FHA, VA, USDA) generally don’t allow escrow waivers regardless of down payment size.
Be aware that even if you qualify for an escrow waiver at closing, your mortgage agreement likely includes a clause allowing the lender to reinstate the escrow requirement if you miss tax payments or allow your homeowners insurance to lapse.
Benefits and Drawbacks of Mortgage Company-Paid Property Taxes
Advantages for Homeowners
Having your mortgage company pay your property taxes through an escrow account offers several benefits:
- Convenience: You don’t have to worry about tracking tax due dates or making separate payments – everything is wrapped into your monthly mortgage payment.
- Payment protection: The mortgage company is responsible for making timely payments, reducing your risk of accidentally missing a tax deadline and incurring penalties or liens.
- Budget management: Breaking annual or semi-annual tax bills into monthly payments makes budgeting easier for many homeowners.
- Peace of mind: You don’t have to save large sums for property tax bills that might come once or twice a year.
- Automatic adjustments: When tax rates change, your mortgage company adjusts your escrow payment accordingly, helping you adapt to changing costs.
- Simpler refinancing: Having an established escrow account can sometimes streamline the refinancing process.
Potential Disadvantages
Despite the conveniences, there are some downsides to having your mortgage company handle your property taxes:
- Reduced cash flow control: Your money is collected monthly rather than allowing you to hold onto it until taxes are due.
- No interest earnings: Most escrow accounts don’t pay interest, meaning you lose the potential to earn interest on that money before tax bills come due.
- Potential for escrow shortages: If your property taxes increase significantly, you might face an escrow shortage, requiring you to increase your monthly payment or make a lump-sum payment to cover the difference.
- Higher initial cash outlay: At closing, you’ll likely need to fund the escrow account with several months’ worth of tax payments.
- Less flexibility for tax strategies: Some homeowners prefer to pay property taxes in specific ways for tax planning purposes, which escrow accounts don’t accommodate.
- Administrative errors: Though rare, mortgage companies can make mistakes in tax payments, requiring homeowner intervention to resolve.
Conclusion
In most cases, having your mortgage company pay your property taxes through an escrow account is the most straightforward approach to managing this significant homeownership expense. The convenience and protection against missed payments outweigh the disadvantages for many homeowners, especially first-time buyers who are adjusting to the many responsibilities of homeownership.
However, if you’re financially disciplined, have a substantial down payment, and prefer having complete control over your property tax payments, exploring an escrow waiver might be worth considering. Just be prepared for the additional responsibility of tracking tax due dates and setting aside sufficient funds to cover those bills when they come due.
Before making any decisions about escrow accounts, consult with your mortgage lender about your specific options. Ask about their escrow waiver policies, any associated fees, and how your decision might affect your interest rate or loan terms. A knowledgeable mortgage professional can help you understand the implications for your particular situation and guide you toward the best choice for your financial circumstances.