Property Tax Is Usually Separate From Your Mortgage Payment

Property tax and your mortgage payment are two different bills. Your mortgage payment covers the loan itself (principal and interest), homeowners insurance, and sometimes mortgage insurance. Property tax is collected separately by your county or municipality and is not part of that payment—unless your lender requires you to pay it through an escrow account.

An escrow account is a holding account your lender controls. If your lender requires one, you pay a portion of your estimated annual property tax each month along with your mortgage payment. The lender then pays your property tax bill when it comes due. This arrangement protects the lender: if you stopped paying property tax, the county could foreclose on the home, and the lender's loan would be at risk.

Whether escrow is required depends on your down payment size and your lender's rules. Borrowers with smaller down payments (typically less than 20 percent) almost always have escrow accounts. Borrowers with larger down payments may have the option to pay property tax directly to the county instead.

Key Takeaways

  • Property tax bills come from your county or municipality, not your mortgage lender, and are legally separate from your mortgage payment.
  • If your lender requires an escrow account, you pay an estimated monthly amount toward property tax as part of your mortgage payment, and the lender pays the bill on your behalf.
  • Lenders typically require escrow accounts for borrowers with down payments under 20 percent to protect their investment in the home.
  • Your property tax amount can change each year based on your home's assessed value and local tax rates, which means your escrow payment may increase or decrease annually.

How Escrow Accounts Work in Practice

When you have an escrow account, your monthly mortgage payment is divided into four parts: principal and interest on the loan, homeowners insurance, property tax, and possibly mortgage insurance. The lender estimates your annual property tax and divides it by 12 to get a monthly amount. That money sits in the escrow account until the tax bill arrives.

Once a year, usually in late fall or early winter, your lender sends you an escrow analysis statement. This document shows how much property tax you actually paid during the year and how much you paid into escrow. If you overpaid, you may get a refund or a credit toward next year's payments. If you underpaid, your monthly payment may go up to cover the shortage.

Property tax amounts change when your county reassesses your home's value or when local tax rates change. A reassessment can happen every few years or after you sell the home, depending on your state. When your assessed value goes up, your property tax bill increases, and so does your escrow payment. This is why your total mortgage payment can shift even though your loan terms have not changed.

When You Pay Property Tax Directly to the County

If your lender does not require an escrow account, you receive the property tax bill directly from your county assessor's office and pay it yourself. The bill usually arrives once or twice a year, depending on your location. You are responsible for paying on time; if you miss the important date, the county charges penalties and interest.

Paying directly means your mortgage payment stays lower because it does not include the escrow portion. However, you must budget for property tax separately and remember to pay it when the bill arrives. Some homeowners set up automatic payments with their county to avoid missing a important date.

Even if you pay property tax directly, your lender may still have the right to require an escrow account later. If you fall behind on property tax payments, the lender can demand that you switch to escrow to protect their interest in the home.

Understanding Your Property Tax Bill

Your property tax bill comes from your county or city assessor, not your mortgage lender. The amount depends on your home's assessed value and your local tax rate. Assessed value is not the same as market value—it is the value the county uses for tax purposes, and it is usually lower than what you paid for the home.

Tax rates vary widely by location. A home worth $300,000 might have an annual property tax bill of $3,000 in one county and $6,000 in another, depending on the local rate. When you are shopping for a home, ask the seller or real estate agent what the current property tax bill is, and factor that into your budget.

Some states and counties offer property tax reductions for homeowners over a certain age, disabled homeowners, or veterans. If you think you might may have access to, contact your county assessor's office to learn what programs are available in your area.

What Happens If Your Escrow Account Runs Short

If your property tax bill is higher than the lender estimated, your escrow account may not have enough money to cover it. When this happens, the lender pays the bill anyway and then adjusts your monthly payment upward to rebuild the account. You will see this increase reflected in your next escrow analysis statement.

Federal law limits how much a lender can require you to keep in escrow. The account balance cannot be more than two months of your average escrow payment, and the lender must refund any overage. If your account falls short, the lender can require you to pay up to two months of escrow in advance, but not more.

If you receive a notice that your escrow account is short, do not ignore it. Contact your lender to understand the reason and discuss your options. In some cases, you can make a one-time payment to cover the shortage instead of raising your monthly payment.

Refinancing and Property Tax

When you refinance your mortgage, your new lender may set up a new escrow account. The old lender must return any balance left in your previous escrow account, usually within 30 days. Make sure you receive this refund; if the old lender does not send it, contact them in writing to request it.

Your new lender will estimate your property tax based on your current bill and set up a new monthly payment. If your property tax has increased since your last refinance, your new escrow payment will be higher. Ask your lender for an estimate of your new total monthly payment before you sign the refinance documents.

Frequently Asked Questions

Can I remove the escrow account from my mortgage?

Some lenders allow you to remove escrow if you have at least 20 percent equity in your home and a good payment history. You would then pay property tax directly to the county. Contact your lender to ask about their policy. Removing escrow lowers your monthly payment but means you must budget for and pay property tax on your own.

What if I disagree with my property tax assessment?

You can challenge your home's assessed value by filing a formal appeal with your county assessor's office. The process and important date vary by state. Contact your assessor's office for instructions. If your appeal is successful and your assessed value is lowered, your property tax bill and escrow payment will decrease.

Does property tax go down if I make home improvements?

Home improvements may trigger a reassessment, which could raise your assessed value and property tax bill. Some improvements, like energy-efficient upgrades, may may have access to for tax breaks in certain states. Check with your county assessor before starting major work to understand the tax impact.

What happens to my escrow account if I sell my home?

When you sell, your lender pays any remaining property tax bills from the escrow account at closing. Any leftover balance is refunded to you. The new owner's lender will set up a separate escrow account for their mortgage.

Why did my escrow payment increase so much?

Escrow payments increase when property tax bills rise, which happens when your home's assessed value increases or local tax rates go up. You will see the increase explained in your annual escrow analysis statement. If the increase seems wrong, contact your lender to verify the calculation.