How to Calculate Property Tax With a Mortgage

Your monthly mortgage payments may include a lot more than the mortgage. Mortgage lenders often require borrowers to include one month's worth of both the annual property tax and homeowners insurance bills as well; that money then goes into escrow until it's time for the lender to pay the entire bill. If you want to know how much your house will cost you each month, figuring out property taxes is part of that.

Function

Mortgage lenders collect money to pay your property taxes to protect their investment in your house, the Bankrate website states. Property tax debt trumps mortgage debt: If your lender forecloses, it would have to settle your tax debt before seeing any money from the sale. If local government forecloses over back taxes, on the other hand, your lender may not see a penny.

Features

Calculating property tax involves more than just applying the tax rate to the value of your house. Different states have a variety of exemptions and rules for adjusting home values. In California, for example, a home's assessed value can't rise more than two percent a year between sales, and veterans can deduct several thousand dollars from the value of their homes. The actual taxable value may be equal to the assessed value or as little as 5 or 10 percent of it. Your county tax assessor should be able to explain your local system.

Size

Once you know the taxable value of your house, apply the millage rate; 1 mill equals $1 per thousand dollars of value, so if your taxable value is $300,000 and the rate is 2 mills, your annual bill would be $600. Keep in mind that many homeowners pay property taxes to their city, their county, the local school board and other taxing districts; to figure out how much you'll pay in property tax every month, add up the total millage rate, multiply it by the taxable value, and divide the result by 12.

Considerations

You'll probably have to pay your first year's taxes as part of your closing costs, the Federal Reserve states. For example, if you buy your home in September and property taxes are due in January, your lender may want an upfront payment covering property taxes for September through December, and the estimated property tax payment for the next 12 months. Lenders can also ask you to put up to two months payment in the escrow account at closing, as a cushion.

Warning

Property tax bills and insurance premiums can change from year to year, so check regularly to be sure of how much you should be paying and that it matches what the lender is billing you. Some loan-servicing companies, CBS Money Watch states, neglect to notify homeowners of a tax hike, use part of the mortgage payment to cover the increased tax, then record the homeowner as missing a mortgage payment and going into default. Don't assume your lender or loan servicer is handling the money properly.

References

• Bankrate.com: Escrow Makes Payments -- Even on Fixed-Rate Mortgages -- Variable
• California State Board of Equalization: Property Taxes
• Florida Department of Revenue: Information for Taxpayers
• CBS Money Watch.com: Foreclosure Fraud -- How You Can Be Driven to Default Even if You Pay on Time
• The Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs

Resources

• Mortgage X: FAQs About Escrow Account