Property tax is not automatically included in your mortgage payment, but your lender can require you to pay it through escrow
When you make a mortgage payment, you are paying principal and interest to your lender. Property tax is a separate bill from your local government. Your lender cannot take that money from your regular payment unless you have agreed to an escrow account — a holding account where you deposit money each month, and the lender pays your property tax and homeowners insurance on your behalf when they are due.
Whether escrow is required depends on your down payment and loan type. If you put down less than 20 percent, most conventional lenders require it. If you put down 20 percent or more, escrow is usually optional — you can choose to pay property tax directly to your county or municipality instead. FHA loans typically require escrow regardless of down payment size.
The amount you pay into escrow each month is an estimate based on your property's assessed tax value and your local tax rate. Your lender recalculates this amount once or twice a year. If you overpaid, you get a refund; if you underpaid, your monthly payment goes up at the next adjustment.
Key Takeaways
- Property tax bills come from your local government, not your lender, and are separate from your mortgage payment unless you have an escrow account.
- Escrow is required if your down payment is less than 20 percent on a conventional loan, or on any FHA loan.
- Your lender estimates your monthly escrow payment based on your property tax assessment and adjusts it annually or semi-annually.
- If you pay down your loan balance to 80 percent of the home's original value, you can request that escrow be removed on a conventional loan.
How escrow accounts work in practice
When you have an escrow account, your monthly mortgage payment has four parts: principal, interest, property tax (held in escrow), and homeowners insurance (also held in escrow). The lender collects all four amounts, deposits the tax and insurance portions into the escrow account, and pays those bills when they come due — usually once or twice a year for property tax, and annually for insurance.
Your lender sends you an escrow statement once a year showing what they collected, what they paid out, and what balance remains in the account. This statement also shows the new monthly escrow amount for the coming year. If your property tax increased or your home's assessed value went up, your escrow payment will rise. If your county reassessed your home at a lower value, your payment may drop.
The escrow account itself earns no interest in most cases. Your money sits there until the bills are due. Some states require lenders to pay a small amount of interest on escrow balances, but this varies by state and by lender.
When property tax is not in your mortgage payment
If you made a down payment of 20 percent or more on a conventional loan, you can choose to pay property tax directly to your county assessor's office or tax collector instead of through escrow. You would receive a property tax bill separately, usually once or twice a year depending on your location, and you pay it on the important date shown on that bill.
This arrangement gives you more control over the timing and amount of your tax payments, but it also means you are responsible for remembering the important date and making sure the payment reaches the right office. If you miss a property tax payment, your county can place a lien on your home or foreclose on it — your lender has no role in preventing this because they are not collecting the money.
Some borrowers prefer this route because they can pay property tax from their own account and potentially deduct it on their federal tax return. If your lender is holding the money in escrow, the deduction belongs to the lender, not to you, though in practice this distinction rarely matters for tax purposes.
Removing escrow from your mortgage
On a conventional loan, you can request that your lender remove the escrow requirement once your loan balance drops to 80 percent of your home's original purchase price or appraised value, whichever is lower. This is called escrow cancellation or impound removal.
To request removal, contact your lender's servicing department and ask about their escrow cancellation policy. They will tell you what documentation they need — usually a current property appraisal or a statement from your county assessor showing the home's current value. Some lenders charge a fee for this process; others do not. Once approved, your monthly payment drops because you are no longer funding the escrow account.
FHA loans do not allow escrow removal, even after you reach 80 percent equity. You must continue paying property tax and insurance through escrow for the life of the loan.
Property tax assessment and escrow adjustments
Your local government assesses your property's value every few years — the frequency varies by county. When the assessment changes, your property tax bill changes, and your lender adjusts your escrow payment accordingly. If your home was assessed at a higher value, your escrow payment rises. If it was assessed lower, your payment drops.
Your lender is required to review your escrow account at least once per year. Most do this on the anniversary of your loan closing. During this review, they compare what they collected against what they actually paid out for taxes and insurance. If there is a surplus (you overpaid), they either refund it to you or credit it toward future payments. If there is a shortfall (you underpaid), they raise your monthly payment to make up the difference over the next 12 months.
Some lenders build a small cushion into the escrow calculation — typically one or two months' worth of taxes and insurance. This cushion protects against sudden increases in tax bills or insurance premiums. Your escrow statement will show this cushion amount separately.
What happens if your property tax bill is higher than expected
If your county reassesses your home and your property tax jumps significantly, your lender will recalculate your escrow payment at the next annual review. Your monthly mortgage payment will increase to cover the higher tax bill. This increase is not optional — if you have an escrow account, you must pay it.
If the increase is large enough, your lender may spread it over several months rather than raising your payment all at once. They will explain this in the escrow statement they send you. You can appeal your property tax assessment through your county's formal process if you believe the value is wrong, but this is separate from your mortgage payment and takes time.
Frequently Asked Questions
Can I pay my property tax separately if my lender requires escrow?
Not while the escrow requirement is in place. If your down payment was less than 20 percent, your lender requires escrow and you must use it. Once your loan balance reaches 80 percent of the home's original value on a conventional loan, you can request removal and then pay property tax directly. FHA loans do not allow this option.
What if my escrow account runs short and my lender cannot pay my property tax bill on time?
This is rare because lenders are required to maintain enough in the escrow account to cover upcoming bills. If a shortfall does occur, the lender is responsible for paying the bill late and covering any penalties. You should not be charged for this. Report it to your lender when ready if it happens.
Does my property tax payment count toward building equity in my home?
No. Property tax is a government fee, not a payment on your loan. Only the principal portion of your mortgage payment builds equity. The interest, property tax, and insurance portions are expenses.
If I pay off my mortgage early, do I get my escrow balance back?
Yes. When you pay off your loan, your lender closes the escrow account and refunds any remaining balance to you, usually within 30 to 45 days. They will also may support all outstanding property tax and insurance bills are paid before closing the account.
Why did my escrow payment go up if my property tax rate did not change?
Your property's assessed value may have increased, or your homeowners insurance premium may have risen. Both affect your escrow payment. Your lender's annual escrow statement will show which bill caused the increase. You can review your property tax assessment with your county assessor if you think the value is wrong.