Your mortgage payment covers principal and interest, but property tax and insurance depend on your loan type
Whether property tax and insurance are rolled into your monthly mortgage payment depends on whether you have an escrow account. If your lender requires one—which is common for loans with less than 20 percent down—your payment includes a portion set aside for taxes and insurance. If you don't have an escrow account, you pay taxes and insurance separately to your county and insurance company. The difference matters because it changes how much money leaves your account each month and who handles paying these bills.
The four components that might be in your payment are principal, interest, property taxes, and homeowners insurance. Not all four appear in every payment. Principal and interest are always there. Taxes and insurance only appear if you have an escrow account.
Key Takeaways
- An escrow account bundles property tax and insurance into your monthly payment; without one, you pay these bills separately to your county and insurance company.
- Lenders typically require an escrow account if your down payment is less than 20 percent of the home's purchase price.
- Your escrow payment changes when property tax rates rise, insurance premiums increase, or your home's assessed value changes.
- You can request to remove escrow once you have built enough equity, though your lender may refuse or require a higher credit score.
How escrow accounts bundle taxes and insurance into one payment
An escrow account is a separate account your lender holds in your name. Each month, you pay a portion of your estimated annual property taxes and insurance premiums along with your principal and interest. The lender holds this money and pays the bills when they come due—usually once or twice a year for property taxes, and annually for insurance.
Your lender calculates the escrow amount by dividing the annual tax and insurance costs by 12. If your property taxes are $2,400 per year and insurance is $1,200 per year, the escrow portion of your payment would be $300 per month. This amount gets added to your principal and interest payment, so you send one check (or make one automatic payment) to your lender instead of tracking multiple bills.
The lender pays these bills on your behalf using the money in escrow. You receive statements showing what was paid and when. This arrangement protects the lender because it ensures taxes and insurance stay current—if either lapses, the lender's collateral (your home) is at risk.
When lenders require escrow and when they don't
Most lenders require an escrow account if your down payment is less than 20 percent. This is because you carry a higher loan-to-value ratio, meaning the lender's risk is greater if the home is damaged or taxes go unpaid. Escrow is a way to reduce that risk.
If you put down 20 percent or more, your lender may offer escrow as optional. Some borrowers choose to keep it for convenience; others remove it to have direct control over when and how they pay taxes and insurance. Loans backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) typically require escrow regardless of down payment size.
Conventional loans with 20 percent down may allow you to waive escrow, but the lender can refuse. Some lenders require a minimum credit score (often 680 or higher) to waive escrow, even with sufficient equity.
Why your escrow payment changes year to year
Your escrow payment is not fixed. It recalculates annually when your lender receives updated property tax assessments or insurance renewal quotes. If your county raises tax rates or your home's assessed value increases, your escrow payment goes up. If your insurance company raises premiums at renewal, your escrow payment rises to cover the new cost.
Your lender sends you an escrow analysis statement once a year, usually around the anniversary of your loan closing. This document shows what was paid out, what remains in the account, and what your new monthly escrow payment will be. If there is a shortage (the account didn't have enough to cover bills), the lender may spread the difference over the next 12 months or ask you to pay it in a lump sum. If there is a surplus, some lenders credit it toward future payments or refund it to you.
These changes can be significant. A 10 percent increase in property taxes or a $200 annual insurance premium hike translates directly into a higher monthly payment.
The difference between escrow and impound accounts
In some states, lenders use the term impound account instead of escrow account. They mean the same thing: a separate account holding money for taxes and insurance. The terminology varies by region and lender, but the function is identical. Your lender's documents will specify which term they use.
Both escrow and impound accounts are required to be held in trust, meaning the lender cannot use the money for its own purposes. Federal law requires lenders to pay interest on escrow balances in some states, though the rate is typically very low.
How to remove escrow if you have enough equity
Once you have built sufficient equity—usually 20 percent or more—you can request to remove escrow. Send a written request to your lender's loan servicing department. Include your loan number and a clear statement that you want to waive escrow.
Your lender will review your request and may approve it, deny it, or approve it with conditions (such as a higher credit score requirement). If approved, your monthly payment drops because taxes and insurance are no longer included. You then pay property taxes directly to your county (usually twice a year) and insurance directly to your insurance company (usually annually).
If denied, ask the lender why. Some lenders have blanket policies against removing escrow; others will reconsider if your credit score improves or if you provide proof of sufficient equity. You can also shop for a loan refinance with a different lender that allows escrow removal.
What happens if your escrow account runs short
A shortage occurs when the money in escrow is not enough to cover taxes and insurance when bills come due. This can happen if tax rates spike unexpectedly or if your insurance company raises premiums more than the lender anticipated.
When a shortage occurs, your lender notifies you in writing and offers options: spread the shortage over the next 12 months (raising your monthly payment), pay the shortage in a lump sum, or some combination. You must choose one of these options; you cannot ignore the shortage because the lender will pay the bills regardless and will recover the money from you.
To avoid surprises, review your escrow analysis statement each year and budget for potential increases. If you know your county is reassessing properties or your insurance is renewing at a higher rate, you can anticipate a payment increase.
Frequently Asked Questions
Can I pay my property taxes and insurance myself instead of through escrow?
Only if your lender allows it. If your down payment was less than 20 percent, your lender almost certainly requires escrow and will not let you pay separately. If you have 20 percent equity and your lender permits escrow removal, then yes, you can pay taxes and insurance directly. Request escrow removal in writing to your loan servicer.
What if I disagree with the escrow amount my lender calculated?
You can request an escrow analysis review. Contact your loan servicer and ask them to recalculate based on current tax assessments and insurance quotes. Bring documentation of your actual tax bill or insurance renewal notice if the lender's estimate seems high. The lender must respond to your request within a reasonable timeframe.
Do I get interest on money sitting in my escrow account?
Some states require lenders to pay interest on escrow balances; others do not. Check your loan documents or contact your lender to find out. Even where required, the interest rate is typically less than 1 percent annually, so the amount is usually small.
What happens to my escrow account if I refinance?
Your old lender closes the escrow account and refunds any balance to you. Your new lender establishes a new escrow account (if required by the new loan terms) and calculates a new monthly escrow payment based on current tax and insurance amounts. The transition usually takes a few weeks.
Can my lender use my escrow money for anything else?
No. Federal law requires escrow funds to be held in trust and used only to pay property taxes and insurance. Your lender cannot use the money to cover its own costs or to offset late payments on your loan. If you believe your lender misused escrow funds, you can file a complaint with your state's banking regulator or the Consumer Financial Protection Bureau.