Why Include Taxes in Your Mortgage Payment?

To some, including property taxes in your monthly mortgage payment is a no-brainer; for others, not so much. Must your property taxes be included in your mortgage payment or can you pay them separately?

The answer depends on the type of mortgage and your equity in it (the value of your home above what you owe on it).

And it boils down to the risk that lenders are prepared to take.

In addition to the risk your lender incurs on the loan amount, there is a risk that the borrower won’t make his or her property tax payments.

And even a property with a paid-up mortgage can still be taken by a governing body, such as a tax assessor, for nonpayment of taxes.

Borrowers who have little savings after their down payment may be unable to put away sufficient money to pay their monthly property taxes. Lenders are concerned about what may happen if unforeseen expenses occur.

Federal Housing Administration mortgage programs require that all mortgage payments include property taxes, mortgage insurance, and property insurance.

This is, in part, due to the fact that many buyers put down as little as 3.5% and may have less-than-ideal credit.

With conventional or Fannie Mae-type loans, each individual lender has its own escrow requirements, mostly based on down payment amount and credit profile.

While lenders may be likely to waive escrow requirements for someone putting down 35% to 40%, they would be unlikely to do so for a borrower with a 15% to 20% down payment.

Even with a very large down payment, the lender may charge a premium in the form of a rate increase to waive escrow and cover the added risk.

And for the borrower, there’s this positive take: Isn’t it better to include these costs in the mortgage payment than to worry every month about how to cover them?