People (especially first time home buyers) will often use a mortgage calculator to see how much their monthly payments will be for a home loan.
They put in the price of the house they want. The interest rate. The length of the mortgage. And maybe a few other odds and ends depending on the calculator.
Then they hit a button and, presto! They get to see what their monthly mortgage payment will be.
Except that monthly payment usually isn’t the full story. There may be other costs and fees that are added to that payment.
In this article we’ll answer the question “are property taxes included in mortgage payments”. We’ll also look at some other factors that might add to your monthly mortgage bill.
Are Property Taxes Included In Mortgage Payments?
The answer to that, usually, is yes. Your property taxes are included in your monthly home loan payments.
If you get a home loan through a private lender then, technically, they don’t have to include the property tax in your monthly payments. But they almost always do. This is referred to as escrow.
Escrow is money your mortgage lender collects each month to pay for certain necessary expenses related to your home. Property taxes are one. The other one is your homeowner’s insurance.
Lenders do this to protect themselves. If you don’t pay your property taxes, then the government can come in and take your home away. This would be bad for you. And it would be bad for the mortgage lender.
By adding a monthly fee to your loan, lenders can avoid this from happening. They way they handle this is by taking your annual property taxes and dividing by 12.
So, if your property taxes are $12,000 a year, they would collect an extra $1,000 from you each month above your payments for principal and interest. (They’ll do the same with homeowner’s insurance, but we’re focusing on taxes here.)
Benefits of Your Mortgage Lender Collecting Your Property Taxes
This arrangement doesn’t just benefit your mortgage lender. It can help you too.
For one, you don’t have to worry about paying your property taxes each year. It’s the mortgage company’s responsibility. Since they are the ones collecting the money, when your property taxes are due, your mortgage company will pay your local government directly. You don’t have to remember to do it or lift a finger in any way.
It also breaks your payment up into nice monthly bite sized pieces for you. So you don’t have to come up with a lump sum when your property taxes are due.
Are You Required To Include Your Property Taxes With Your Mortgage Payment?
What if you’d prefer to pay these taxes directly? Do you have to include them with your mortgage payments?
If you go with a conventional loan, then no. It’s not required. But you may pay a fee (ie. points at closing) to get out of doing it. Or, some lenders may give you a discount if you do.
If you have a Federal Housing Administration, or FHA, loan, then you don’t have a choice. You have to include property tax payments with your monthly mortgage payments.
Other Fees You May Have To Pay With Your Mortgage
In addition to property taxes, we mentioned that you will usually also have to pay your homeowner’s insurance premium to your mortgage company each month. Again, this is known as escrow.
In addition to that, you may have to pay PMI, or Private Mortgage Insurance. This is a payment that those who have a down payment that’s less than 20% of the cost of their house.