Property taxes do not automatically come out of your mortgage payment unless you set up an escrow account
Your mortgage payment itself—the amount you owe the lender for borrowing the money—covers only principal and interest. Property taxes are a separate bill from your local government. However, most lenders require you to pay property taxes through an escrow account, which is a holding account the lender controls. Each month, you send the lender extra money beyond your principal and interest payment. The lender holds this money and pays your property taxes and homeowners insurance directly to the tax assessor and insurance company when they are due.
This arrangement protects the lender. If you stopped paying property taxes, the government could place a lien on the house or foreclose on it—which means the lender loses their collateral. By collecting the money from you monthly and paying the bills themselves, the lender makes sure that does not happen.
Key Takeaways
- Your mortgage payment typically includes principal, interest, property taxes, and homeowners insurance—often abbreviated as PITI.
- The property tax portion sits in an escrow account controlled by your lender, not in your own bank account.
- Your lender calculates the monthly escrow amount by estimating your annual property taxes and insurance, then dividing by twelve.
- If your property taxes or insurance costs rise, your monthly payment will increase when the lender adjusts the escrow amount.
- You can request an escrow waiver in some cases, but most lenders will not allow it, and you would then pay property taxes directly to your local government.
How the escrow account actually works
When you close on your mortgage, the lender estimates what you will owe in property taxes and homeowners insurance over the next year. They add these amounts together, divide by twelve, and roll that number into your monthly payment. For example, if your estimated annual property taxes are $2,400 and your homeowners insurance is $1,200, that is $3,600 per year, or $300 per month added to your mortgage payment.
Every month, you send the lender the full amount—principal, interest, taxes, and insurance combined. The lender deposits the tax and insurance portions into the escrow account and keeps them there until the bills are due. When your property tax bill arrives, the lender pays it from the escrow account. When your insurance premium renews, the lender pays that too. You never write a separate check to the tax assessor or the insurance company.
The lender sends you an annual escrow statement showing what they collected, what they paid out, and what balance remains in the account. This statement is your record of where the money went. If there is a surplus—meaning they collected more than they spent—some lenders credit it toward next year's payments, and some refund it to you. If there is a shortage, they may ask you to make up the difference or spread it across the next twelve months.
When and why your payment amount changes
Your property tax bill does not stay the same every year. Your local assessor may raise the assessed value of your home, or your municipality may increase the tax rate. When this happens, your lender recalculates the escrow amount and adjusts your monthly payment upward. You will receive a notice before the change takes effect, usually thirty days in advance.
The same applies to homeowners insurance. If your insurer raises your premium or you switch to a different policy, the lender adjusts the escrow amount. Some lenders also require you to maintain a small cushion in the escrow account—typically one or two months' worth of taxes and insurance—so they have a buffer if costs spike unexpectedly.
These adjustments are one reason mortgage payments can feel unpredictable even though you locked in an interest rate. The principal and interest portion stays the same for the life of the loan (on a fixed-rate mortgage), but the escrow portion fluctuates with local tax and insurance costs.
What happens if you want to skip the escrow account
Some borrowers ask whether they can pay property taxes directly to the government instead of through escrow. In most cases, the answer is no. Conventional lenders, FHA loans, and VA loans all typically require escrow as a condition of the mortgage. The lender's reasoning is straightforward: they cannot afford the risk that you will neglect to pay.
A few lenders may allow an escrow waiver if you have a very high credit score, a large down payment, and a low loan-to-value ratio—meaning you are borrowing a small percentage of the home's value. Even then, it is rare. If you do get a waiver, you become responsible for paying your property taxes directly to your local tax assessor's office and your homeowners insurance directly to your insurance company. You will receive bills from each, and you must pay them on time. Missing a property tax payment can result in penalties, interest, and eventually a tax lien on your home.
The difference between escrow and impound accounts
You may hear the terms escrow account and impound account used interchangeably. They mean the same thing in the mortgage context—a holding account where the lender collects money for taxes and insurance. Some lenders use one term, some use the other. The mechanics are identical.
Do not confuse this with an escrow account used during the home purchase itself. During closing, a separate escrow account holds the earnest money deposit and other funds until the sale is complete. That escrow closes after you receive the deed. The escrow account for taxes and insurance is a different account that opens after closing and remains open for as long as you have the mortgage.
How to read your escrow statement and spot errors
Your lender is required to send you an escrow statement at least once per year, usually in advance of the tax year. The statement shows the opening balance, deposits you made, payments the lender made on your behalf, and the closing balance. Check it against your property tax bill and insurance invoice to make sure the amounts match.
Errors do happen. A lender might pay the wrong amount, miss a important date, or fail to account for a tax reduction you received. If you spot a discrepancy, contact your lender's escrow department in writing. Keep copies of your property tax bill and insurance invoice as proof. The lender is required to investigate and correct errors within a set timeframe, usually thirty to forty-five days.
What to do if your escrow account runs short
If the lender discovers that the escrow account does not have enough money to cover upcoming bills, they will notify you. You have a few options: pay the shortage in a lump sum, have the lender spread it across the next twelve months (which raises your monthly payment), or let the lender cover it temporarily and add it to future payments. The lender cannot force you into one option—you can choose which works best for your budget.
Shortages usually happen because property taxes or insurance costs rose more than the lender predicted. To avoid surprises, review your escrow statement each year and compare the estimated taxes and insurance to your actual bills. If you know your property taxes are going up, you can ask the lender to adjust the escrow amount early rather than waiting for the annual recalculation.
Frequently Asked Questions
Can I pay my property taxes separately if I have an escrow account?
No. Once the lender has set up escrow, they pay the taxes directly from the escrow account. If you also pay the tax assessor, you will overpay. Contact your lender if you want to change this arrangement, though most will not allow it.
What if my property taxes decrease?
Your lender will recalculate the escrow amount and lower your monthly payment. You may also receive a refund if the escrow account has a surplus. Check your escrow statement to see how the lender handles the reduction.
Do I get a tax deduction for property taxes if they come out of escrow?
Yes. The fact that your lender pays them does not change your tax situation. You can still deduct property taxes on your federal income tax return, up to the limits set by the IRS. Keep your escrow statement as documentation.
What happens to escrow if I refinance my mortgage?
The old escrow account closes, and any remaining balance is either refunded to you or credited toward closing costs. Your new lender will open a new escrow account and recalculate the monthly amount based on current property taxes and insurance rates.
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 property taxes and homeowners insurance. The money must be held in a separate account and used only for those bills.