As a borrower, when you buy a home, you take on more than just a mortgage loan; you also take on property taxes. These taxes are charged by your local government based on the assessed value of your home and help pay for public services like schools, police, and road maintenance. Property taxes vary depending on where you live, and they’re often one of the most confusing parts of owning a home.
Your tax bill is usually sent once or twice a year, but many homeowners don’t pay it directly. Instead, your mortgage servicer collects money from you each month and pays the taxes on your behalf using your escrow account. We’ll explain how that works below.
To better understand how property taxes are calculated and what they fund, the National Association of Realtors offers a simple guide for new homeowners.
An escrow account is a separate account set up by your bank or mortgage lender to collect and hold funds to pay certain recurring homeownership costs. These typically include property taxes, homeowners insurance, and sometimes mortgage insurance premiums.
Here’s how it works:
This simplifies your life by combining everything into one payment and helping you avoid missed bills. The Consumer Financial Protection Bureau explains how escrow accounts function and why they are commonly required.
Most lenders require a mortgage escrow account if your down payment is less than 20%, or if you’re using government backed loans like FHA, VA, or USDA loans. These programs are designed to help first time homebuyers, but they come with more safeguards to protect both you and the lender.
By collecting funds in advance for property taxes and insurance, your servicer ensures those bills are paid on time, reducing risk of home sales falling into delinquency. It also helps the homeowner budget more easily by spreading large bills out over 12 months.
Escrow accounts are especially useful for single parent households or anyone living paycheck to paycheck, as they prevent surprises during tax season.
Your total mortgage payment includes more than just the loan principal and interest. In most cases, it also covers:
This total amount is referred to as your monthly mortgage payment. As property taxes or insurance premiums go up (which they often do), your monthly payment will increase too. Your lender may perform an annual escrow account review and adjust your monthly payments to ensure enough is being collected.
The San Diego County Treasurer-Tax Collector provides a helpful PDF guide for new homeowners explaining what to expect from your first tax bill and how your escrow account interacts with local tax deadlines.
As a homeowner, you may qualify for a variety of tax deductions and tax credits that can reduce what you owe when you file your federal tax return. These benefits can make a big difference, especially for first time homebuyers still adjusting to the costs of homeownership.
Common tax deductions include:
Tax credits may be available at the federal or state level. For example, some states offer a first-time homebuyer tax credit to ease the initial costs of buying a home. Learn more about how these work in our article on state-level homebuyer tax credits.
Also, mortgage credit certificates (MCCs) may allow qualified buyers to claim a credit for a portion of their mortgage interest, reducing their federal taxes owed. MCCs are typically offered through loan programs administered by state or local housing agencies.
Some other programs, like local assistance grants or forgivable loans, may also help with property taxes or closing costs for first time homebuyers.
Note: If you take the standard deduction, you cannot also itemize deductions like property taxes or mortgage interest. Speak with a tax professional if you’re unsure which option is better for you.
Let’s take a closer look at what your escrow account usually covers:
It may also cover flood insurance or other insurance payments if required by your lender.
Your mortgage servicer estimates these costs annually based on past bills. If there’s a shortfall, they may increase your monthly mortgage payment to cover it. If you end up paying too much, you may get a refund or have your future payments reduced.
Paying mortgage points—also known as discount points—when you close on your loan can help lower your interest rate. Each point usually costs 1% of the loan amount and may be deductible in the year you paid them.
If you paid points as part of a home purchase (not a refinance), and the home is your primary residence and a permanent structure, you may be able to deduct the full amount in the year you paid them. This can provide a nice bonus during tax season.
The IRS’s Publication 530 offers detailed guidance on these rules and other tax deductions for homeowners.
Sometimes your escrow account doesn’t collect enough to cover rising property taxes or insurance premiums. This can happen when local tax rates increase, or if your insurance bills rise due to market changes.
In these cases, your mortgage servicer will send you an escrow analysis. This outlines what was paid, what was collected, and any shortage or overage.
If there’s a shortage, you’ll typically have two options:
Either way, it’s important to plan ahead and track your insurance and tax bill history. Knowing what to expect can prevent surprises in your budget.
If you used a government-backed loan—like those from the Federal Housing Administration (FHA)—you’re typically required to have an escrow account for the life of the loan. This requirement helps ensure that property taxes and insurance are paid on time, protecting both you and your lender.
This also applies to other government-backed loans, such as those offered through the VA or USDA. Even with conventional loans, most lenders require escrow unless you make a large enough down payment (usually 20% or more).
Your mortgage lender is responsible for setting up the escrow account, but your mortgage servicer is the one who manages it day to day. The servicer ensures bills are paid and adjusts your monthly payments as needed.
To see how your local tax system interacts with escrow, review resources like the San Diego County New Homeowners Property Tax Guide (PDF), which explains how tax bills, home sales, and assessments work in practice.
Some homeowners encounter unique scenarios that affect their tax return or escrow account:
If any of these situations apply, speak with a tax advisor before claiming deductions on your federal tax return.
Here are some helpful strategies for staying on top of property taxes and escrow accounts:
For more practical tips on tax planning, read our article on the basics of taxes.
If you’re a first time homebuyer, tax season may feel overwhelming. Here are a few reminders that can help:
Filing correctly the first time helps prevent problems down the road and may unlock bigger savings than you expected.
Owning a home comes with many costs beyond your mortgage payment, and property taxes are one of the biggest recurring expenses. Managing your escrow account, staying alert during tax season, and understanding what you can deduct or claim helps you protect your finances for the long haul.
Whether you’re preparing to buy your first home or want to sharpen your understanding as a current homeowner, taking time to learn how property taxes work is an investment in your financial success.
Take the next step by registering for a First-Time Home Buyer Education class with Credit.org’s nonprofit counseling team. You’ll learn everything you need to confidently manage your monthly mortgage payment, plan for property taxes, and avoid common pitfalls.
