Are Property Taxes Included in Mortgage Payments in Texas?
In the early days of your home search, one of the most important steps is to set a realistic budget. Online tools can be a great help—for example, with a mortgage payment calculator, you can get a good idea of what the monthly cost would be for a new home. This can help people begin to create a homebuying budget that they can sustain.
Homebuyers need to be aware of all the costs of homeownership, though. One of the costs that aren’t added to a monthly mortgage calculator is the cost of property taxes. Texas property taxes are a tax paid on a property owned by an individual or other legal entity. They vary greatly depending on your state, city, and county. In Texas, the average property tax is approximately 1.8%. But, how and where does this get paid? Many mortgage lenders require you to set up a property tax escrow account. Does this mean your mortgage loan includes your property taxes?
Does My Mortgage Pay My Property Taxes?
Most often, mortgage lenders roll your property taxes into your monthly payments, so it can sometimes look like they’re included in your mortgage. However, they’re distinctly separate. The taxes are paid into an escrow account where your money is held until your property taxes are paid to your local taxing entities once a year. This helps many people as they can better budget for property taxes rather than receiving a large bill at the end of the year. If you look at your mortgage statement, this is charged in addition to the principal, interest, and insurance you pay to your lender.
However, some people prefer not to have an escrow account. Savings accounts, money market accounts, a CD, or other investments would allow homeowners to get a little return on their money rather than having it sitting in the bank waiting for tax day.
Whether you prefer an escrow account or have another way to budget, the most important factor is to ensure you are prepared for property taxes one way or another. Bills still unpaid by the January 31st deadline will become delinquent property taxes, accrue penalties and interest charges, and can lead to the loss of your property.
Am I Required to Pay My Property Tax in My Mortgage?
The requirements to pay for your property tax in your mortgage depend on the type of mortgage you have. Government-backed loans such as an FHA, USDA, or VA loan require an escrow account. A down payment lower than 20% may also motivate your lender to require an escrow account. If you have one of these types of mortgages, then yes, you are required to pay your property tax in your mortgage.
If you don’t want your property tax to be a part of your mortgage, there are opportunities to avoid it. If you pay 20% down (or more) or show a consistent record of on-time payments, you may be able to get rid of your escrow account. It’s important to discuss your options and preferences with your lender. Learning about all of your options can help you to make the best financial decisions and allow you some flexibility.
What Happens if the Tax Estimate is Off
Your tax estimate is usually split into 12 and then added to your monthly payment. However, this is just an estimate, so the numbers sometimes don’t add up at the end of the year. If the tax estimate is incorrect, you may owe additional money, have a higher monthly payment next year, or get a refund.
If your tax estimate is too high, you will get a refund for the extra money paid. If your payment is too low, you will be required to pay the difference. Some lenders will want a lump sum, while others will allow you to roll the difference into next year's monthly payments.
Your mortgage servicer should send you confirmation of the property taxes paid and show whether your monthly payments were sufficient. They may suggest a higher payment for properties increasing in value as your property taxes are charged at a percentage of your assessed value. Mortgage servicers may also suggest a higher payment if the estimate was low to be sure you aren’t short for the following year.
Property Tax Paid During Refinance
If you refinance your home loan between October and January, you may have some changes to your payments as well. All property taxes must be paid before you close the new home loan. So, if your taxes are due and your escrow account is short, you will have to pay the difference before closing.
It’s important to keep in mind that your county will reject additional funds for taxes already paid. If you do have to write a check and your taxes have already been paid, you will get a refund. Any remaining money in your escrow account will be returned to you. While you may not receive the refund money for a few weeks, a rate drop is a good reason to refinance your mortgage. The long-term savings from a refinance may be worth it for your overall budget.
Property Tax After Paying Off a Mortgage
When you pay off your mortgage, you still have to pay property taxes. You’ll just pay the taxing entity directly instead of the mortgage company doing it for you.
Each county will provide clear instructions for how, where, and when to pay. Usually, this information is available on the county website.
This can be an adjustment for those used to their mortgage company taking care of this process for them. However, most counties have several payment options and make the process as easy as possible. For example, those paying Austin property taxes can pay online, over the phone, by mail, in person, or through a drop box, and they may have pre-payment and payment installment options available.
Why Do Mortgage Companies Pay Your Property Taxes?
Lenders manage your property tax payments to protect themselves and the money they lend. Property tax liens take priority over mortgage debt. If the property taxes are delinquent, the taxing entity will take possession of the home and sell it in a property tax sale. In Texas, this wipes out the mortgage, and the lender is out their money. If the lender pays the taxes, they can take possession and sell the property themselves to ensure they get their money back.
Mortgage companies use escrow accounts to help protect their money. This is why they may have extra requirements if you want to cancel your escrow account.
My Mortgage Company Didn't Pay My Property Taxes; What Now?
Take action as soon as possible. The first thing you need to do is notify your mortgage lender. Send a copy of the bill and a notice of error. You will also want to contact the tax entity as soon as possible.
Federal law states that if you send a notice of error letter to your mortgage servicer, they must acknowledge receiving the letter within 5 business days. If they did forget to pay your property tax bill, they must fix the error within 30 business days and cover the cost of any penalties. Be sure to discuss the situation with your taxing entity and let them know when they can expect payment.
Property tax bills left unpaid and unresolved may cause a tax lien to be put on your property. This may result in property seizure and foreclosure.
You do not want to leave property tax issues hanging over your head. Handle any issues with payment as soon as possible.
Is it Better to Pay Property Taxes With Your Mortgage?
Whether or not a homeowner should have an escrow account to pay for property tax depends on each owner. If you have the option to have an escrow account or to pay taxes on your own, you need to consider your financial habits.
Address whether or not you are good at budgeting your money. If you are, you may not need an escrow account as long as you set aside enough money to cover your yearly property taxes. If you aren’t great at budgeting, or simply want the peace of mind of paying as you go, an escrow account is probably in your best interest. There’s nothing worse than receiving a hefty bill at the end of the year that you aren’t sure you can cover. Building your escrow account throughout the year will help ensure you have enough money to pay your property taxes.
Escrowing Taxes and Insurance
Another positive factor of using an escrow account to pay taxes and insurance is the simplicity. One monthly payment covers your principal, interest, property tax, mortgage insurance, and homeowners insurance. There’s no need to remember yet another account number, bill, online password, etc.
While there is a chance you will have to pay an escrow shortage or increase your monthly payments, the simplicity of one payment is attractive.
Paying Property Taxes Separate From Mortgage
On the other hand, paying your property taxes separately from your mortgage has its benefits as well. Escrow accounts do not collect interest. Some owners prefer that their money is collecting interest while it is sitting in a bank. Allocating money each month to pay for future property tax payments on your own allows your money to work for you. Having more control of your money can pay off if you are disciplined financially.
Managing Your Monthly Mortgage Payments
The key to Texas property taxes is straightforward: pay them. Whether you benefit from one uncomplicated monthly payment or prefer to set aside money on your own, you will have to pay.
If you don’t like your current payment method, there are options available. Talking to your mortgage servicer can help you get the outcome you are looking for.
While no one likes to pay property taxes, they are part of what makes the Lone Star State so grand. Public schools, streets, libraries, playgrounds, medical services, police, and firefighters are each funded by property taxes. Each time you stroll down a smooth street or enjoy a community park, you can see your tax dollars at work. Property taxes are one of the necessary costs of living in the great state of Texas.