Buying a home is exciting, but it comes with a lot of questions. One common question is, “Does mortgage company pay property taxes?” If you’re a homeowner or planning to buy a house, understanding how property taxes work with your mortgage is key.
What Are Property Taxes?
Property taxes are fees you pay to your local government based on the value of your home. These taxes help fund things like schools, roads, and public services.
Every homeowner has to pay them, usually once or twice a year. The amount depends on where you live and how much your property is worth.
For example, if your home is valued at $300,000 and your local tax rate is 1.5%, you’d owe $4,500 in property taxes each year.
Sounds like a lot, right?
That’s why many homeowners want to know how their mortgage fits into this.
How Do Mortgage Companies Fit In?
When you take out a mortgage to buy a home, your lender might offer to handle your property taxes for you.
But they don’t pay them out of kindness. Instead, it’s part of a system to make sure the taxes get paid on time.
Here’s how it usually works:
- Escrow Accounts: Most mortgage companies set up an escrow account when you get your loan. This is like a savings account where you send a little extra money each month. The mortgage company uses this money to pay your property taxes and homeowners insurance when they’re due.
- Why They Do It: Lenders want to protect their investment. If you don’t pay your property taxes, the government could place a lien on your home. That’s bad news for both you and the lender. By managing the taxes, they ensure everything stays on track.
- Not All Lenders Require It: Some lenders let you pay your property taxes directly. This depends on your loan type, your credit, and how much you put down when buying the home.
If your mortgage includes an escrow account, your monthly payment will cover four things: principal, interest, taxes, and insurance. This is often called a PITI payment.
How Does an Escrow Account Work?
Let’s break down escrow accounts a bit more. When you make your monthly mortgage payment, part of it goes into the escrow account.
The mortgage company holds onto this money and uses it to pay your property taxes and insurance when the bills come due.
Here’s a simple look at the process:
| Step | Description |
|---|---|
| 1. Monthly Payment | You pay your mortgage, including an extra amount for escrow. |
| 2. Escrow Collection | The lender puts the extra money into your escrow account. |
| 3. Tax Payment | When property taxes are due, the lender pays them using the escrow funds. |
| 4. Annual Review | The lender checks if you’re paying enough into escrow. They may adjust your payment if taxes or insurance costs change. |
This system makes things easier because you don’t have to save up a big chunk of money to pay your taxes all at once. Instead, you spread the cost over the year.
Do All Mortgage Companies Pay Property Taxes?
Not every mortgage company handles property taxes the same way.
Here’s a quick look at when they might or might not pay your taxes:
- Conventional Loans: Most conventional loans come with an escrow account, especially if your down payment is less than 20%. The lender will likely pay your property taxes for you.
- FHA Loans: These loans almost always require an escrow account. The mortgage company will handle your property taxes.
- VA Loans: Like FHA loans, VA loans usually include an escrow account, so the lender pays the taxes.
- No Escrow Option: If you have a strong credit score, a big down payment, or a specific loan type, some lenders let you skip the escrow account. In this case, you’re responsible for paying your property taxes directly to the government.
If you don’t have an escrow account, you’ll need to budget carefully.
Missing a property tax payment can lead to penalties or even a lien on your home.
What Happens If You Don’t Have an Escrow Account?
If you pay your property taxes yourself, you’ll get a bill from your local tax office. This usually comes once or twice a year, depending on where you live.
You’ll need to make sure you have enough money saved to cover the bill.
Here are a few tips to stay on top of it:
- Set Up a Savings Plan: Divide your annual property tax bill by 12 and save that amount each month. For example, if your taxes are $6,000 a year, save $500 a month.
- Mark Your Calendar: Know when your tax payments are due. Some counties offer discounts if you pay early.
- Check for Exemptions: Some areas offer tax breaks for seniors, veterans, or low-income homeowners. Contact your local tax office to see if you qualify.
Paying taxes yourself gives you more control, but it also means more responsibility.
If you’re not great at budgeting, an escrow account might be a safer choice.
Can Your Mortgage Payment Change Because of Property Taxes?
Yes, your mortgage payment can change if your property taxes go up or down.
Here’s why:
- Property Value Changes: If your home’s value increases, your property taxes might go up. This is common in areas where real estate prices are rising.
- Tax Rate Changes: Local governments can raise or lower tax rates. If the rate goes up, so does your tax bill.
- Escrow Adjustments: If you have an escrow account, your lender reviews it every year. If your taxes or insurance costs increase, they’ll raise your monthly payment to cover the difference.
For example, let’s say your property taxes jump from $4,000 to $4,800 a year.
If you have an escrow account, your lender might increase your monthly payment by $66 to cover the extra $800. They’ll send you a letter explaining the change.
What If You Miss a Property Tax Payment?
Missing a property tax payment is a big deal. If your mortgage company pays your taxes through an escrow account, they’ll usually make sure the bill gets paid on time.
But if you’re paying taxes yourself, here’s what could happen if you miss a payment:
- Penalties and Interest: Most tax offices charge late fees and interest if you don’t pay on time.
- Tax Lien: If you ignore the bill for too long, the government can place a lien on your property. This means they have a legal claim to your home until you pay up.
- Foreclosure Risk: In extreme cases, unpaid taxes could lead to foreclosure. This is rare, but it’s something to avoid at all costs.
If you’re struggling to pay your taxes, contact your local tax office.
Many offer payment plans to help you catch up.
Benefits of Having Your Mortgage Company Pay Property Taxes
Letting your mortgage company handle your property taxes has some perks.
Here’s why many homeowners prefer it:
- Convenience: You don’t have to worry about saving up for a big tax bill. It’s built into your monthly payment.
- Peace of Mind: Your lender makes sure the taxes are paid on time, so you avoid penalties or liens.
- Easier Budgeting: Spreading the cost over 12 months makes it easier to manage your finances.
On the flip side, you might not like giving up control.
Some homeowners prefer to handle taxes themselves to earn interest on their savings or take advantage of early payment discounts.
FAQs About Does Mortgage Company Pay Property Taxes
Q. Can I stop my mortgage company from paying my property taxes?
Yes, but it depends on your lender and loan type. If you want to pay taxes yourself, ask your lender about waiving the escrow account. You’ll need good credit and often a larger down payment. Keep in mind that some loans, like FHA, require escrow.
Q. What happens if my escrow account runs low?
If your property taxes or insurance costs go up, your escrow account might not have enough money. Your lender will cover the bill but may increase your monthly payment to rebuild the escrow balance. They’ll notify you of any changes.
Q. Do I still owe property taxes if my mortgage is paid off?
Yes. Property taxes are tied to owning a home, not your mortgage. If you pay off your loan, you’ll need to pay the taxes directly to your local tax office unless you set up a new payment plan with a bank or lender.
Conclusion
Understanding whether your mortgage company pays your property taxes can save you a lot of stress.
For most homeowners, an escrow account makes things simple by spreading the cost of taxes and insurance over the year.
But if you prefer more control, you might be able to pay your taxes yourself. Either way, stay informed about your tax bills and talk to your lender if you have questions.
Disclaimer: This blog is for informational purposes only and should not be considered financial or legal advice. Always consult with a qualified professional, such as a mortgage lender or tax advisor, for guidance specific to your situation.
