Here’s an actual question I received from one of my readers:
I just received a property tax notice from my county. Do I have to pay this?
This is a common question that many homeowners grapple with.
The answer is yes if you own your house outright. That means you’re not making regular mortgage payments to a lender.
The answer is no for many of us that have a mortgage (loan) on the house. That’s because your loan (re)payments are most likely set up so that a portion of your payment goes toward principal and interest, and the rest into escrow to pay our property taxes and homeowners insurance.
Amy pays $1,000 a month to Acme Home Loans, Inc. for her house payment (mortgage)
- $800 goes to principal and interest
- $150 is for property taxes (escrow)
- $50 homeowners insurance (escrow)
If your mortgage is for your primary residence, only a portion of the monthly amount goes toward principal and interest; the rest goes toward taxes and interest.
There are exceptions to this general rule, but if you’re in an arrangement where your taxes are not paid out of escrow, chances are you’re well aware of it.
What is escrow?
Escrow is a term used to describe a holding account for money that will be paid out on your behalf – namely property taxes and insurance. It’s managed by the company that services your loan.
In the example above, $200 of Amy’s $1,000 monthly mortgage payment would go into an escrow account managed by her mortgage company. At certain times throughout the year, her loan servicer pays money from escrow to the county (or other entity) for property taxes and homeowner’s insurance.
What happens if I have too little or too much money in escrow?
If the amount in your escrow account isn’t enough to cover taxes and insurance, you may have to pay more.
If your escrow balance exceeds your taxes and insurance due, you’ll likely get a refund.
Since the cost of taxes and insurance can vary from year to year, the amount in your escrow holdings may be less than needed some years and more than needed in other years. When this happens, you may have to pay more out of pocket to settle the difference when her account is short, or she may get a refund, when her escrow balance is more than needed.
How do I know if my mortgage servicer is paying my taxes out of escrow?
Many mortgage companies now allow you to create an online account to look at the details of your mortgage. One of those details is your escrow balance and activity. Whether or not you have online access, your mortgage servicer is required to report your escrow account details at least once per year. If you’re still unsure if your property taxes are being paid from escrow, you can always call the servicing company and ask them directly.
Just because you receive a property tax notice in the mail, it doesn’t mean you need to stress about writing another check. Chances are you’ll only need to keep making your normal monthly mortgage payment. A portion of each payment is held in escrow on your behalf. A few times a year, your loan servicer will cut checks to the entities to whom your property tax and homeowner’s insurance are due.