Your escrow account pays property taxes on your behalf, but only if your lender set one up

When you have a mortgage, your lender may require you to maintain an escrow account — a separate account where you deposit money each month that the lender uses to pay property taxes, homeowners insurance, and sometimes other costs on your behalf. If your lender requires escrow, then yes, the escrow account pays your property taxes directly to your county or local tax assessor. You never write the check yourself.

Not all mortgages require escrow. If you put down 20 percent or more, or if you refinanced and have significant equity, your lender may let you pay property taxes on your own. In that case, you receive a bill from your county and pay it directly. The choice between escrow and self-payment depends on your loan terms and what your lender allows.

Key Takeaways

  • Escrow accounts are required by most lenders when your down payment is less than 20 percent, and the lender uses the account to pay your property taxes automatically.
  • Your monthly mortgage payment includes an escrow portion that covers property taxes, homeowners insurance, and sometimes mortgage insurance or HOA fees.
  • The lender estimates your annual tax bill and divides it by 12 to determine your monthly escrow payment, which means the amount can change each year.
  • If you pay off your mortgage or refinance into a loan that does not require escrow, you become responsible for paying property taxes directly to your county.
  • Escrow accounts do not earn interest, so the money sits in the account until the lender pays your bills on the dates they are due.

How the escrow payment gets calculated and collected

Your lender estimates what your property taxes will be for the coming year based on your home's assessed value and your local tax rate. The lender divides that estimate by 12 and adds that amount to your monthly mortgage payment. So if your county estimates your annual property tax at $2,400, your lender adds $200 to your monthly payment and deposits it into escrow.

The same process happens for homeowners insurance. Your lender gets a quote for your annual premium, divides it by 12, and adds that to your payment as well. If you have a mortgage with less than 20 percent down, your lender may also require you to pay mortgage insurance (PMI) through escrow. All of these amounts sit in the escrow account until the bills come due.

Once a year, usually in the fall, your lender reviews the escrow account to make sure the estimate was accurate. If property taxes went up or your insurance premium increased, the lender raises your monthly escrow payment. If the estimate was too high, your payment may go down, or you may receive a refund. This annual adjustment is called an escrow analysis.

When your lender pays the bills from escrow

Your lender does not pay your property taxes on the day you make your mortgage payment. Instead, the lender holds the money in escrow and pays the bills on the dates they are actually due. Property taxes are usually due once or twice a year, depending on your county — some counties bill in spring and fall, others bill once in the fall. Your lender knows these dates and pays before the important date so you never face a late penalty.

The same timing applies to homeowners insurance. Your insurance policy renews on a specific date each year, and your lender pays the premium from escrow before that date expires. If you have PMI, the lender pays that monthly or annually depending on your loan type. You receive statements showing what the lender paid and when, so you can verify the payments match your bills.

What happens if the escrow account runs short

Sometimes the escrow account does not have enough money to cover the bills when they come due. This can happen if property taxes or insurance premiums rose more than the lender expected, or if the lender's estimate was straightforward too low. When this occurs, the lender covers the shortage and then raises your monthly escrow payment to replenish the account over the next year.

You will see this as a higher mortgage payment starting the next month. The lender is required to send you a notice explaining the shortage and the new payment amount. If the shortage is large, some lenders allow you to pay it back over two months instead of one, though this varies by lender and state law.

Escrow requirements and when they end

Most lenders require escrow when your down payment is less than 20 percent. This protects the lender because it ensures property taxes and insurance are paid on time — if either lapses, the lender's collateral (your home) is at risk. Once you have paid down your mortgage to 80 percent of the home's original value, you may request to remove escrow, though the lender is not required to agree.

If you refinance your mortgage, the new lender may or may not require escrow depending on how much equity you have and the lender's own policies. If you pay off your mortgage entirely, the escrow account closes and any remaining balance is refunded to you. From that point forward, you pay property taxes directly to your county by receiving a bill in the mail.

The difference between escrow and paying taxes yourself

If you pay property taxes yourself, you receive a bill from your county assessor's office, usually once or twice a year. You are responsible for paying by the important date, and if you miss it, you face late fees and interest charges. The advantage is that you control the timing and can see exactly where your money goes.

With escrow, the lender handles the payment, so you do not have to remember due dates or write separate checks. The trade-off is that your money sits in the escrow account earning no interest, and you have less visibility into exactly when and how much the lender pays. You also cannot deduct the escrow payment itself on your taxes — you deduct the actual property taxes paid, which the lender reports to you on a statement called a 1098-T or similar form at the end of the year.

Escrow accounts and your credit report

Escrow accounts do not appear on your credit report because they are not a loan or a line of credit. They are straightforward a holding account for money you provide. However, if your lender fails to pay your property taxes or insurance from escrow, that failure can damage your credit and your home. For this reason, it is worth reviewing your escrow statements each year to confirm the lender paid the bills on time.

If you notice a payment was missed or made late, contact your lender when ready. Most servicers have a process to correct escrow errors, and catching them early prevents penalties and credit damage.

Frequently Asked Questions

Can I opt out of escrow if my lender requires it?

Most lenders will not allow you to opt out of escrow if your down payment was less than 20 percent. Once you reach 20 percent equity, you can request removal, but the lender can refuse. Some lenders have their own policies about when escrow can be removed, so ask your servicer what their rules are.

What if I disagree with the escrow estimate?

If you believe the lender's estimate is wrong, you can request a new escrow analysis and provide documentation of the actual tax bill or insurance quote. The lender must review your request, though they are not required to change the estimate if they believe theirs is more accurate. Disagreements are usually resolved by comparing your actual bills to the estimate.

Do I get interest on money sitting in escrow?

No. Escrow accounts are non-interest-bearing, meaning the money earns nothing while it sits there. This is standard across all lenders. The money is held in trust for you, but you do not benefit from any interest it might otherwise earn.

What happens to escrow if I sell my home?

When you sell, the sale proceeds pay off your mortgage, which closes the escrow account. Any remaining balance in escrow is refunded to you, usually within a few weeks. The new owner and their lender will set up their own escrow account based on the new loan terms.

Can the lender use my escrow money for something else?

No. Federal law prohibits lenders from using escrow funds for any purpose other than paying the bills the account was created for. If a lender misuses escrow money, it is a violation of the Real Estate Settlement Procedures Act (RESPA) and can result in penalties and legal action.