Taxes are not included in your base mortgage payment, but your lender may collect them anyway
Your mortgage payment covers principal, interest, and insurance — but not property taxes. However, most lenders require you to pay taxes as part of your monthly mortgage payment through an account called an escrow account (sometimes called an impound account). The lender collects a portion each month, holds the money, and pays your property tax bill when it comes due. You end up paying taxes monthly even though they are not technically part of the mortgage itself.
Some mortgages do not include taxes in the monthly payment. This happens when you put down 20 percent or more, when you refinance with a lender that does not require escrow, or when you have a portfolio loan from a smaller bank. In those cases, you pay property taxes directly to your county or municipality on your own schedule — usually once or twice a year in a lump sum.
The amount your lender collects each month depends on your property tax bill and your loan amount. If your taxes are $2,400 a year, your lender divides that by 12 and adds roughly $200 to your monthly payment. If taxes rise, your monthly payment rises with them.
Key Takeaways
- Most mortgages include property taxes in the monthly payment through an escrow account, even though taxes are not technically part of the loan itself.
- Your lender collects a portion of your annual tax bill each month, holds it in escrow, and pays the bill when due.
- Mortgages with less than 20 percent down almost always require escrow; mortgages with 20 percent or more may not.
- If your property taxes increase, your monthly mortgage payment will increase, usually after your lender receives the new tax assessment.
- You can request to remove escrow from your mortgage if you meet your lender's requirements, but you then pay taxes directly to your county.
How escrow accounts work and when your lender collects taxes
When you close on a mortgage, your lender estimates your annual property tax bill based on the assessed value of your home and your local tax rate. The lender divides that estimate by 12 and adds that amount to your monthly mortgage payment. That money goes into an escrow account held by the lender or a third-party escrow company — not into your own savings account.
When your property tax bill arrives, the lender pays it directly from the escrow account. Most counties bill property taxes once or twice a year. Your lender handles the payment; you do not write a check to the county yourself. The lender also sends you an annual escrow statement showing how much was collected, how much was paid out, and what balance remains.
If the escrow account runs short — because taxes rose or the lender underestimated — the lender adds the shortfall to your next monthly payment or spreads it over several months. If there is a surplus, the lender either refunds it to you or credits it against future payments, depending on the amount and your loan agreement.
When property taxes are not included in your mortgage payment
Escrow is not required on all mortgages. If you put down 20 percent or more, many lenders will let you pay property taxes on your own. If you refinance, your new lender may not require escrow if your loan-to-value ratio is low enough. Some portfolio lenders — banks that keep loans on their own books rather than selling them — do not require escrow at all.
When escrow is not required, you receive the property tax bill directly from your county and pay it yourself. You are responsible for knowing the due date and making the payment on time. Missing a property tax payment can result in penalties, interest, and eventually a tax lien on your home.
Even if your lender does not require escrow, you can ask to set one up. Some borrowers prefer the predictability of a fixed monthly payment over managing a large tax bill once or twice a year.
What happens when property taxes increase
Property tax assessments change over time, and when they do, your escrow payment changes too. Your lender receives the new tax bill or assessment and recalculates your monthly escrow contribution. The adjustment usually takes effect within one to three months of the assessment date.
Your lender will notify you of the change in writing, showing the old and new escrow amounts. The increase is added to your monthly mortgage payment. If the increase is large, some lenders allow you to spread the adjustment over several months instead of raising your payment all at once.
You cannot avoid this increase by switching lenders, because the tax bill follows the property, not the mortgage. A new lender will collect the same amount based on the current assessment.
How to remove escrow from your mortgage
If your lender requires escrow and you want to remove it, you must meet certain conditions. Most lenders require a loan-to-value ratio of 80 percent or lower, meaning you have at least 20 percent equity in the home. You also need a good payment history — usually at least 12 months of on-time payments — and a credit score above a certain threshold (often 680 or higher, but this varies by lender).
To request removal, contact your lender's loan servicing department and ask about their escrow waiver process. You will need to submit a written request and may need to pay a fee, typically $100 to $300. Some lenders charge an annual fee to maintain a non-escrowed account. The lender will review your request and either approve or deny it.
Once escrow is removed, you are responsible for paying property taxes directly to your county. Set a reminder for the due date, because missing a payment can trigger penalties and a tax lien. You also lose the lender's protection: if you forget to pay, the lender cannot step in and pay on your behalf.
The difference between taxes, insurance, and principal in your payment
A typical mortgage payment has four parts: principal, interest, property taxes, and homeowners insurance. Principal and interest go to the lender and reduce your loan balance. Property taxes go to your county or municipality. Homeowners insurance goes to your insurance company. Only the principal and interest are technically part of the mortgage debt.
The acronym PITI stands for Principal, Interest, Taxes, and Insurance — the four components of a full monthly payment. When a lender quotes your monthly payment, they usually include all four. If you see a payment that includes only principal and interest, that is the base mortgage payment; taxes and insurance are separate.
Some mortgages also include mortgage insurance (PMI) if your down payment was less than 20 percent. PMI protects the lender if you default, and it is added to your monthly payment until you reach 20 percent equity or meet other removal conditions.
What to do if your escrow account has a problem
Escrow problems are common. Your lender may overestimate taxes and collect too much, leaving a large surplus. Or they may underestimate and collect too little, creating a shortage that gets added to your next payment as a surprise increase. Some lenders make errors in calculating the escrow amount or fail to pay the tax bill on time.
If you receive an escrow statement and notice an error, contact your lender immediately. Ask for an explanation of how the amount was calculated. If the lender made a mistake, request a corrected statement and a refund or credit. If you believe the estimate is too high, ask the lender to recalculate based on your actual tax bill.
If your lender fails to pay your property tax bill on time, you may receive a notice from your county. Contact your lender right away and ask them to pay immediately. You may also need to contact your county to explain that the lender is responsible. Keep records of all communication in case a tax lien is filed.
Frequently Asked Questions
Can I pay my property taxes separately even if my lender requires escrow?
No. If your lender requires escrow, you must pay taxes through the escrow account as part of your monthly payment. You cannot opt out unless you meet the lender's requirements for escrow removal, which usually means having at least 20 percent equity and a good payment history.
What happens to my escrow account if I refinance?
When you refinance, your old lender closes the escrow account and refunds any balance to you. Your new lender opens a new escrow account and collects taxes based on their estimate. There may be a gap of a few weeks between when the old account closes and the new one opens, so watch for property tax bills during that time.
Why did my monthly payment go up if I did not change my mortgage?
The most common reason is a property tax increase. Your lender received a new tax assessment and recalculated your escrow contribution. Insurance premiums can also increase, raising your monthly payment. Review your escrow statement to see which component changed.
Do I get a refund if my escrow account has a surplus?
It depends on the amount and your lender's policy. Small surpluses (usually under $50) are typically credited to your next payment. Larger surpluses may be refunded to you by check or credited over time. Your annual escrow statement will show what happened to any surplus.
What if I disagree with my property tax assessment?
You can file a formal appeal with your county assessor's office. The process and deadlines vary by location. If your appeal is successful and taxes are lowered, your lender will recalculate your escrow amount and your monthly payment will decrease. Your lender does not handle the appeal; you must do it yourself.