Your escrow account can pay property taxes, but only if your lender requires it
An escrow account is a separate account your mortgage lender holds in your name. Money goes into it each month as part of your mortgage payment, and the lender uses that money to pay your property taxes and homeowners insurance when those bills come due. You do not write the checks yourself — the lender does it for you.
Whether your escrow account pays property taxes depends on your loan agreement. Some lenders require an escrow account for all borrowers. Others offer it as optional. A few do not offer it at all. If your lender requires escrow, property taxes will be paid from that account. If escrow is optional and you chose not to use it, you pay property taxes directly to your county or municipality.
The main reason lenders require escrow is protection: they want to know property taxes are paid on time, because unpaid taxes can lead to a tax lien on the property. A lien gives the government a claim against the house, which threatens the lender's security. By controlling the escrow account, the lender removes that risk.
Key Takeaways
- Your lender may require an escrow account as a condition of your mortgage, or may offer it as an option you can choose.
- If you have an escrow account, your lender collects money each month and pays your property taxes directly to the county or municipality.
- The amount collected each month is an estimate based on your previous year's tax bill, so the account may have a small surplus or shortage each year.
- You can request an escrow analysis from your lender if you believe the monthly amount is wrong or if your property taxes have changed.
How the monthly escrow payment is calculated
Your lender estimates what your annual property taxes will be, divides that by 12, and adds that amount to your monthly mortgage payment. For example, if your property taxes are estimated at $2,400 per year, your lender adds $200 to your mortgage payment each month.
The lender bases this estimate on your previous year's tax bill or on the assessed value of your home. When your property taxes actually come due — usually once or twice a year depending on your county — the lender pays the bill from your escrow account using the money that has accumulated.
Because property tax bills change from year to year, the amount in your escrow account will not be exact. Some years you may have a small surplus (the lender collected more than needed), and some years a small shortage (the lender collected less). Most lenders allow a small cushion — often one or two months' worth of escrow payments — to handle these variations.
When your escrow payment goes up or down
If your property taxes increase, your lender will increase your monthly escrow payment. This usually happens once a year, often in the fall or winter when new tax assessments come out. Your lender will send you a notice explaining the change and your new mortgage payment amount.
If you receive a notice that your escrow payment is rising significantly, it may be because your property was reassessed at a higher value, your local tax rate increased, or because the lender's previous estimate was too low. You can ask your lender for an escrow analysis — a detailed breakdown of what the lender collected, what it paid out, and what it estimates for the coming year.
If you believe the estimate is wrong — for example, if you know your property taxes decreased — you can request a new analysis. Bring documentation of your actual tax bill to support your request. The lender is not required to lower the payment, but they must conduct the analysis and explain their reasoning if they decline.
What happens if there is a shortage or surplus
At the end of each escrow year (timing varies by lender), your lender performs an escrow reconciliation. This is a review of what went in, what went out, and what remains. If there is a surplus of more than a certain amount — often $50 to $100, though this varies — the lender must refund it to you, usually by check or credit to your mortgage account.
If there is a shortage, the lender has options. Some lenders add the shortage to your next month's payment. Others spread it across several months. Some allow you to pay it in a lump sum. Your loan documents or escrow account agreement will specify which method applies to you.
A small shortage is normal and not a sign of a problem. It straightforward means the lender's estimate was slightly low. If you consistently see large shortages, that is worth discussing with your lender, because it may mean your property taxes have risen faster than the lender anticipated.
Escrow accounts versus paying taxes yourself
If your lender does not require escrow and you choose to pay property taxes yourself, you are responsible for knowing when the bill is due and sending payment to your county or municipality. You must pay on time to avoid penalties and interest. You also must track the payment for your records, because you may be able to deduct property taxes on your federal income tax return.
The advantage of an escrow account is that you do not have to think about it — the lender handles the timing and the payment. The disadvantage is that you lose some control over the money, and you may pay a small amount in escrow fees (though many lenders do not charge these). If you prefer to manage your own taxes and your lender does not require escrow, you can decline it and pay directly.
What to do if you think your escrow account is wrong
Start by reviewing your escrow account statement. Your lender sends this at least once a year, and it shows what was collected, what was paid out, and what the estimate is for the coming year. Compare the property tax amount on the statement to your actual tax bill from your county. If they do not match, contact your lender and ask for an escrow analysis.
Bring documentation: your actual property tax bill, a notice of assessment if you received one, or a letter from your county showing the current tax amount. Explain what you believe is wrong. The lender will review the information and either adjust the payment or explain why the current amount is correct.
If you disagree with the lender's conclusion, you can file a complaint with your state's banking regulator or the Consumer Financial Protection Bureau. However, most escrow disputes are resolved by straightforward providing the lender with current tax documentation.
Frequently Asked Questions
Can I opt out of escrow if my lender requires it?
In most cases, no. If your lender requires escrow as a condition of the loan, you must maintain it. Some lenders allow you to request removal of escrow after you have paid down the loan to a certain level (often 80 percent of the original loan amount), but this is at the lender's discretion and is not may provide.
What if my property taxes are paid by someone else, like a trust or family member?
If someone else owns the property or has a legal claim to it, they may be responsible for taxes, not you. However, if you are the borrower on the mortgage, your lender will still require an escrow account to may support taxes are paid. Discuss your situation with your lender and your attorney to clarify who is responsible.
Do I get interest on money sitting in my escrow account?
Most escrow accounts do not earn interest. The money sits in the account until the tax bill is due, then the lender pays it out. Some states require lenders to pay interest on escrow accounts, but the rate is typically very low. Check your loan documents or ask your lender whether your state requires interest.
What if I pay off my mortgage early — what happens to my escrow account?
When you pay off your mortgage, your escrow account closes. Any remaining balance is refunded to you, usually within 30 to 45 days. However, you become responsible for paying property taxes yourself going forward, so make sure you know when your next tax bill is due.
Can my escrow payment change mid-year?
Usually escrow payments change once a year when the lender conducts the annual analysis. However, if your property is reassessed or if there is a major change in your tax bill, some lenders will adjust the payment outside the normal cycle. You will receive notice of any change before it takes effect.