Are Property Taxes Include in Mortgage Payments? Think 'PITI'

Some homebuyers don't realize that mortgage payments don’t just pay off the principal of the loan. That “PITI” acronym stands for "principal, interest, (property) tax, and insurance," which are the components of many homeowners’ monthly payments.

We’ve already covered what property taxes are and what they pay for in a community, but how are they paid exactly? What happens when the property tax bill is due?

According to SFGATE, most homeowners pay their property taxes through their monthly payments to their mortgage lenders. In fact, lenders often require monthly property tax payments for homeowners who put down less than 20 percent of the buying price for their down payment.

By requiring monthly property tax payments, lenders are protecting themselves, since they would have to pay the property tax bill if a homeowner goes into foreclosure, as SmartAsset explains. This liability is what gives lenders the authority to foreclose on a property if the homeowners don’t pay their property taxes.

Lenders typically use escrow accounts to hold your property tax and homeowner insurance money until the respective bills are due. For property tax, taxing authorities invoice the lender annually or semi-annually and the lender uses the escrow money to pay the bill.

As SmartAsset reports, lenders calculate your monthly property tax payments by dividing your estimated annual property tax burden by 12. These calculations are just estimates, of course, so you might end up with more money in your escrow than needed, in which case you’ll get a refund, or less, in which case you’ll pay the difference.

But you might want to make sure your mortgage lender is on top of that property tax bill. “Despite this common process, it is good to confirm with a bank or lender in the beginning how this works to ensure they understand their role,” SFGATE adds. “As the homeowner, you are ultimately responsible for timely payments.”

Instead of using escrow accounts and relying on banks to pay your property taxes, you might be able to pay those bills yourself, depending on your debt-to-loan ratio.

But as SFGATE points out, there isn’t much to gain by paying property taxes yourself if you have the option of paying through an escrow account. You won’t have to pay as much to your lender each month if you self-pay, but you will be on the hook for big cash outlays once or twice a year when your property tax bill arrives.

Either way, keep in mind that you’ll make your own property tax payments after you pay off your mortgage since “your lender no longer has the obligation to pay your real estate taxes and homeowners insurance premium,” as Ilyce Glink and Samuel J. Tamkin wrote for The Washington Post. “From the day you pay off your loan, you must take on the obligation to pay these bills yourself—on time and in full.”