Property taxes are usually collected by your lender, not paid separately
Your mortgage payment itself does not include property taxes. Instead, your lender collects property tax money from you each month as part of an escrow account — a holding account managed by your loan servicer. The servicer takes a portion of your monthly payment, sets it aside, and pays your property taxes directly to your county or municipality when they come due.
This means you are paying property taxes through your mortgage payment, but the money does not go to the principal or interest on your loan. It goes into escrow. Your lender requires this arrangement because property taxes are a lien on the home — if taxes go unpaid, the county can foreclose on the property, which puts the lender's investment at risk.
Not all mortgages require escrow. Some lenders allow borrowers to pay property taxes directly to the county, but this is less common and usually requires a larger down payment or higher credit score. Most conventional loans, FHA loans, and VA loans include escrow as a standard condition.
Key Takeaways
- Your lender collects property tax money monthly through escrow and pays the county on your behalf when taxes are due.
- The escrow portion of your payment is separate from principal and interest and does not reduce what you owe on the loan.
- Your monthly escrow payment is an estimate based on your property's assessed value and your county's tax rate, and it can change annually.
- If your escrow account runs short or has a surplus, your lender will adjust your monthly payment or send you a bill or refund.
How escrow is calculated and what it covers
Your lender estimates your annual property tax bill, divides it by 12, and adds that amount to your monthly mortgage payment. The servicer deposits this money into your escrow account and pays the taxes when the county sends the bill. Most escrow accounts also include homeowners insurance premiums and, if applicable, private mortgage insurance (PMI).
The escrow estimate is based on the assessed value of your home and your county's millage rate — the tax rate per $1,000 of assessed value. If your home is reassessed or your county raises its tax rate, your escrow payment will increase. Your lender is required to review the escrow account annually and send you a statement showing what was collected, what was paid out, and what remains in the account.
Escrow accounts typically maintain a small cushion — usually one to two months' worth of taxes and insurance. This buffer protects against shortfalls if taxes or insurance costs rise unexpectedly between annual reviews.
When your escrow payment changes
Your escrow payment can increase or decrease based on several factors. If your property is reassessed and the assessed value goes up, your property taxes rise, and so does your escrow payment. If your homeowners insurance premium increases, that portion of escrow increases too. Conversely, if your county lowers tax rates or your insurance premium drops, your escrow payment may decrease.
Your lender must notify you of any escrow payment change at least 10 days before the new amount takes effect. The notification will show the old payment, the new payment, and the reason for the change. If the change is large, you have the right to request a review or dispute the calculation.
Some borrowers receive an escrow shortage notice, meaning the account did not have enough money to cover taxes and insurance when they came due. In this case, your lender will either increase your monthly payment going forward or require you to pay the shortage in a lump sum. A surplus notice means you overpaid, and the lender will either credit the excess toward future payments or send you a refund, depending on the amount and your lender's policy.
What happens if you pay off your mortgage early
When you pay off your mortgage, the escrow account closes. Your lender will pay any outstanding property taxes and insurance from the escrow balance. If money remains after all bills are paid, the lender sends you a refund, usually within 30 days. If the account is short, you will receive a bill for the difference.
Once the mortgage is paid off, you become responsible for paying property taxes and homeowners insurance directly to the county and your insurance company. You will no longer have these costs bundled into a monthly payment.
Opting out of escrow (if your lender allows it)
Some lenders allow borrowers to handle property taxes and insurance on their own, without escrow. This option is typically available only to borrowers with strong credit, a substantial down payment (often 20% or more), and a loan-to-value ratio below a certain threshold. VA loans and some FHA loans have restrictions on opting out.
If you opt out, you pay your property taxes directly to your county and your homeowners insurance directly to your insurance company. Your mortgage payment covers only principal, interest, and PMI (if applicable). This gives you more control over the timing and method of payment, but it also means you are responsible for remembering due dates and ensuring payments are made on time.
Opting out of escrow does not lower your mortgage payment by much — the savings are only the interest your lender would have earned on the escrow balance. Most borrowers find the convenience of escrow worth the minimal cost.
How to read your escrow statement
Your annual escrow statement breaks down what your lender collected and paid on your behalf. It shows the opening balance, deposits made during the year, payments to the county and insurance companies, and the closing balance. It also projects next year's escrow payment based on estimated taxes and insurance costs.
If you notice an error — such as a duplicate payment or an incorrect tax amount — contact your lender's servicing department immediately. Provide documentation from your county or insurance company to support your claim. Lenders are required to investigate escrow discrepancies within 45 days.
Keep your escrow statements for your records. They are useful for tracking your property tax payments and can help you understand why your monthly payment changed from year to year.
Frequently Asked Questions
Can I pay my property taxes separately if I have a mortgage?
Most lenders require escrow as a condition of the loan, so you cannot opt out unless your lender specifically allows it and you meet their requirements. If your lender does allow it, you would pay the county directly, but your mortgage payment would not decrease significantly.
What if my county raises property taxes mid-year?
Your lender will adjust your escrow payment at the next annual review to account for the higher tax rate. If the increase is substantial, you may see a significant jump in your monthly payment. Your lender must notify you of the change before it takes effect.
Does escrow money earn interest?
In most states, escrow accounts do not earn interest for the borrower. Your lender holds the money in a non-interest-bearing account. A few states require lenders to pay interest on escrow balances, but the rate is typically very low.
What if I disagree with my escrow payment amount?
You can request a review of your escrow calculation. Contact your lender's servicing department and provide documentation of your property's assessed value and your county's tax rate. If you believe the calculation is wrong, the lender must investigate and respond within 45 days.
Do I get a refund if I refinance my mortgage?
Yes. When you refinance, your old lender closes the escrow account and refunds any surplus to you. Your new lender will establish a new escrow account based on the new loan amount and current tax and insurance estimates.