Is Property Tax Included in Your Mortgage Payment?

If you’re a new homeowner or looking to purchase a house in the near future, you may have many questions about real estate taxes. Many Americans buy homes on mortgages that they have to pay for monthly over a number of years. Some may be wondering if their mortgage pays their property taxes.

Homeownership comes with a variety of expenses. In addition to mortgage payments, there are utility bills, homeowners’ association fees, property insurance, and real estate taxes. Altogether, it can become a huge financial burden.

The money that the local government spends on public services such as schools, road maintenance, and fire departments comes from somewhere. Property taxes are a major source. These apply to owners of real estate, from residential homes to commercial buildings, and they must be paid for as long as the owner holds the property.

From saving for a downpayment to improving your credit score, you’ve worked hard to qualify for a mortgage to fund the purchase of your dream home. Now you have to make the monthly mortgage payments and your house is subject to property tax. How does that work?

In most cases, mortgage lenders estimate your annual property tax liability and calculate the amount you need to pay every month to cover it. They'll then include the property tax in the monthly bill they send you, so you don’t have to pay it separately.

For example, say the bank estimates your 2022 property tax to be $1,200, which works out to $100 per month. The bank would add the $100 to your monthly mortgage bill. When you make your mortgage payment, the bank puts the property tax in a special account and then releases the funds to your local government when the property tax is due.

If it turns out that the bank overestimated or underestimated the tax, your tax refund would be adjusted accordingly. Whereas banks typically roll real estate tax into mortgage payments, it’s important to check with your lender if it’s actually doing that to avoid trouble.

Once you’ve paid off your mortgage, the lender stops collecting and paying property tax on your behalf and the responsibility falls on you. Depending on where you live, you may be required to pay the tax annually or semiannually.

The real estate tax rate also depends on where you live and the property’s assessed value. If you think your property was overvalued and you bear an excessive tax liability, you may be able to contest the bill.

If you’ve lost your job or experience financial hardship, it may be difficult to keep up with the property taxes. The problem is that if you fall behind on real estate taxes (even by a few months), your property could be seized and auctioned off to recoup the unpaid taxes.

To resolve such situations, there are a few steps you could take. You could contact the local tax authority to explain your case. You may also be eligible for an exemption or reduction of the bill—some local governments offer real estate tax exemptions or reductions to veterans, the elderly, or disabled residents. Additionally, amid climate change concerns, you may be eligible for a reduction if you’ve installed renewable energy systems in your home.