Must Taxes Be Included in a Mortgage Payment?

If you own a home, it’s not so much a question of whether you’ll pay property taxes but rather how you'll pay them. Property taxes are based on your locality’s tax rate and the assessed value of your home. How you must pay them depends on your lender.

Most lenders require that taxes be included in your mortgage payment. The common term for this arrangement is “PITI.” The acronym stands for principal, interest, taxes and insurance. They’re all rolled into one monthly payment.

Private lenders have the option of imposing this arrangement on you…or not. But most will do so, particularly for higher-priced loans as well as Fannie Mae and Freddie Mac loans. It’s almost inevitable that home taxes will be included in your mortgage payment if you finance more than 80 percent of your home’s value. Lenders operate on the assumption that the more money you have invested in the home, the less likely you are to do anything that might make you lose it – like neglecting to pay your property taxes.

Including property taxes in mortgage payments is mandatory with FHA loans, but VA loans don’t require it.

So what happens with this extra money you’re paying each month? Your lender will place it in an escrow account to accumulate a balance that will be available when the tax bill eventually comes due. These accounts are sometimes tagged with the ominous term “impound” accounts, but some homeowners consider them a good thing. Think of it this way: Your lender is legally obligated to pay your tax bill on your behalf from this balance. You won’t have to worry about it. And if the lender doesn’t pay, it – not you – is liable for any damages that occur, such as removing a resulting tax lien.

There’s no one-size-fits-all PITI calculator because the exact terms can depend on your lender. The equation isn’t particularly complicated, but it’s not an exact science either.

Your lender will first determine how much your annual property tax bill is likely to be. It will then divide this number by 12. If it’s anticipated that your tax bill will be $3,000 a year, expect to see $250 added to your principal and interest payment each month for home taxes.

Some lenders will add a little to the calculated number just to be on the safe side, to ensure that there’s enough money in the escrow account to pay the tax bill when the time comes. Tax rates can increase at any time, throwing those initial calculations off. If your taxes are $250 a month, you might have to pay $275 or even $300. But don’t worry, you should receive a refund of any money that’s left over in escrow after the tax bill is paid. Of course, if the lender’s estimate is off and you underpay, you’ll have to come up with that additional money at year’s end.

You probably don’t have much wiggle room if your lender’s policy is to collect PITI. It's like an insurance policy for the lending bank, which is on the hook for these taxes if you default on your loan and it has to foreclose. It wants to have as much money sitting in that escrow account as possible should this occur.

Some lenders are even willing to reward borrowers if they consent to a PITI arrangement. They’ll offer you a lower interest rate if you agree to have your taxes paid this way.