Real estate taxes are not automatically included in your mortgage payment, but your lender can require you to pay them through an escrow account

When you take out a mortgage, you owe two separate debts: the loan itself and the property taxes on the land. Your lender does not roll taxes into your monthly payment by default. However, most lenders require borrowers to set aside money each month in an escrow account — a holding account managed by the lender — so that taxes (and homeowners insurance and mortgage insurance, if applicable) can be paid when they come due. This means you may see taxes listed on your monthly mortgage statement, but you are not paying the lender; you are funding an account the lender controls on your behalf.

Whether taxes appear in your payment depends on the type of loan and your down payment. Conventional loans with less than 20 percent down almost always require escrow. FHA loans require it. VA and USDA loans typically do as well. If you put down 20 percent or more on a conventional loan, your lender may allow you to pay taxes directly to your county or municipality instead of through escrow — but many lenders still require escrow anyway. The loan documents you sign will state whether escrow is mandatory or optional.

Key Takeaways

  • Real estate taxes are a separate obligation from your mortgage and are not automatically included in the loan amount.
  • Most lenders require an escrow account where you deposit money each month to cover taxes, insurance, and sometimes mortgage insurance when they are due.
  • Your monthly escrow payment is calculated by dividing the annual tax bill by 12, plus a buffer, so the amount can change year to year.
  • If you pay off your mortgage early or refinance, your escrow account is closed and any remaining balance is returned to you.
  • You can request to remove escrow only if you have sufficient equity and your lender permits it, which is rare on loans with less than 20 percent down.

How escrow accounts work and what they cover

An escrow account is a separate bank account held in your name but controlled by your mortgage servicer (the company that collects your payments). Each month, you deposit money into this account as part of your regular mortgage payment. The servicer then pays your property taxes, homeowners insurance, and mortgage insurance (if required) directly from this account when the bills arrive.

The servicer estimates your annual tax bill and divides it by 12 to calculate your monthly escrow payment. If your property taxes are $2,400 per year, for example, your monthly escrow contribution would be $200, plus a small cushion (usually one to two months' worth of taxes) to cover any increases. When your county reassesses your property and raises the tax bill, your servicer recalculates the escrow payment and adjusts your monthly bill upward.

You receive an annual escrow statement showing what was paid out and what remains in the account. If there is a surplus (the servicer overestimated), you may receive a refund or a credit toward next year's payments. If there is a shortage (taxes rose more than expected), the servicer may ask you to pay the difference in a lump sum or spread it over the next 12 months.

The difference between escrow and paying taxes directly

If your lender permits you to pay taxes directly, you handle the bill yourself. Your county or municipality sends you a tax bill, usually once or twice a year depending on your location. You pay the taxing authority directly, not your lender. Your mortgage payment covers only the loan principal and interest (and insurance if required separately).

Paying taxes directly gives you more control over the timing and method of payment — you can pay online, by check, or in person. However, it also means you must remember to pay on time. If you miss a tax payment, the county can place a lien on your property, and your lender can foreclose even if you are current on the mortgage itself. For this reason, most lenders do not allow direct payment unless you have substantial equity in the home.

Direct payment is most common among borrowers who have owned their home for many years, have paid down the mortgage significantly, or refinanced into a loan with a much lower balance relative to the home's value. Even then, the lender's approval is not may provide.

When taxes are added to your escrow account

Your escrow account begins on the day your mortgage closes. The title company or closing attorney typically collects an initial deposit at closing to fund the account with enough money to cover the first tax payment. This is separate from your down payment and closing costs.

After closing, your monthly mortgage payment includes principal, interest, taxes (via escrow), insurance, and possibly mortgage insurance. The servicer deposits the tax and insurance portions into escrow and pays the bills when due. If you refinance your mortgage with the same lender, the escrow account may continue with a recalculated payment. If you refinance with a different lender, the old servicer closes the account and refunds any balance; the new servicer opens a new account.

If you pay off the mortgage early — whether through a large lump-sum payment or by refinancing to a shorter term — the escrow account closes. Any money remaining in the account is returned to you within 30 to 45 days, usually by check or credit to your bank account.

How property tax increases affect your mortgage payment

Property taxes are not fixed. Your county assessor periodically reassesses property values, and your tax bill can rise or fall as a result. When taxes increase, your escrow payment increases too, because the servicer recalculates based on the new bill.

The servicer typically sends you a notice of the new escrow payment before it takes effect. If your taxes jump significantly — for example, after a major home renovation or in a neighborhood where values are rising — your monthly payment can increase by $50, $100, or more. This is not a fee the lender is charging; it is a direct result of the tax bill itself.

Some states and municipalities offer tax breaks for homeowners, senior citizens, veterans, or properties in certain zones. If you think you may be may have access to to a reduction, contact your county assessor's office. Lowering your tax bill will lower your escrow payment as well.

Removing escrow from your mortgage

You can request to remove escrow only under specific conditions. Most lenders require you to have at least 20 percent equity in the home (meaning you owe no more than 80 percent of its value). You must also have a good payment history — typically no late payments in the past 12 months — and your lender must agree in writing.

Even if you meet these conditions, many lenders refuse to remove escrow because it protects them. If you fail to pay taxes, the lender's collateral (your home) is at risk. By holding escrow, the lender ensures taxes are paid and the property is not foreclosed by the county.

If your lender does allow you to remove escrow, you will need to provide proof that you have paid property taxes on time in the past. You may also be required to sign a document acknowledging that you understand the consequences of missing a tax payment. Once escrow is removed, your monthly payment drops, but you become solely responsible for paying taxes on time.

What happens if your escrow account runs short

A shortage occurs when the servicer underestimated your tax bill or insurance costs. For example, if your county reassessed your property mid-year and the new bill was higher than expected, the escrow account may not have enough money to cover the full payment when it comes due.

When this happens, the servicer notifies you and offers options: pay the shortage in full, add it to your next month's payment, or spread it over the next 12 months. Most borrowers choose to spread it out so the impact on their monthly budget is smaller. The servicer recalculates your escrow payment going forward to prevent another shortage.

A surplus occurs when the servicer overestimated. You will receive a refund check, usually within 30 days of the servicer's annual escrow review. Some servicers offer the option to keep the surplus in the account as a cushion against future increases.

Frequently Asked Questions

Can I pay my property taxes separately if my lender requires escrow?

No. If your loan documents require escrow, you must fund the account each month. Your lender will not release you from this requirement unless you refinance with a different lender or meet the equity and payment history standards to request removal. Attempting to pay taxes directly while escrow is required can result in the lender paying the taxes from escrow anyway and charging you a fee.

What if I disagree with my county's property tax assessment?

You can file a formal challenge with your county assessor's office or tax board of appeals. The process and important date vary by location, but most counties allow you to request a reassessment or attend a hearing to dispute the value. If your challenge succeeds and the tax bill is lowered, notify your mortgage servicer so they can recalculate your escrow payment.

Do I get a tax deduction for the escrow payments I make each month?

You deduct the actual property taxes paid, not the escrow deposits. Your servicer sends you a statement each year showing how much was paid to the taxing authority. Use that figure on your tax return, not the monthly escrow amount. The IRS does not allow a deduction for the escrow account itself, only for the taxes actually paid.

What if I sell my home before the year ends?

At closing, the title company or attorney conducts a proration. If you have paid taxes for the full year through escrow but are selling mid-year, the buyer reimburses you for the portion of taxes they will owe. Your escrow account is closed, and any remaining balance is refunded to you. The buyer's lender opens a new escrow account for their portion of the year.

Does escrow protect me from tax liens?

Yes, as long as your servicer pays the taxes on time. Because the servicer controls the escrow account and pays the bill directly to the county, you are protected from liens as long as you make your monthly mortgage payment. If you pay taxes directly and miss a payment, the county can place a lien on your property regardless of whether you are current on the mortgage.