Property taxes are not automatically included in your mortgage payment, but your lender can require you to pay them through an escrow account
When you get a mortgage, the monthly payment you make covers the loan principal and interest. Property taxes are separate. However, most lenders require you to set aside money each month in an escrow account — a holding account managed by your lender — so that when your property tax bill comes due, the money is already there. Your lender then pays the tax bill on your behalf.
This means property taxes often appear as a line item on your monthly mortgage statement, even though they are not technically part of the loan itself. The amount varies based on your local tax rate and your home's assessed value, so your monthly escrow payment changes when your property is reassessed or when tax rates shift.
Some borrowers have the option to pay property taxes directly to their county or municipality instead of through escrow, but this is uncommon and usually only available to borrowers with significant equity or excellent credit. Most lenders will not allow it because they want assurance the taxes will be paid — unpaid property taxes can lead to a tax lien on the home, which puts the lender's investment at risk.
Key Takeaways
- Property taxes are not part of your mortgage loan but are usually collected monthly through an escrow account your lender manages.
- Your lender requires escrow to may support property taxes are paid on time, protecting their stake in the home.
- The monthly escrow amount changes when your home is reassessed or when local tax rates change.
- You can request to pay property taxes directly in some cases, but most lenders do not permit this option.
- Your mortgage statement will show property taxes as a separate line item even though they flow through your lender's escrow account.
How escrow accounts work with property taxes
When you close on your home, your lender estimates your annual property tax bill and divides it by 12. That amount is added to your monthly mortgage payment and held in escrow. The lender pays the tax bill when it comes due, usually once or twice a year depending on your county's schedule.
Your lender sends you an escrow analysis at least once a year, usually in the fall. This statement shows how much you paid into escrow over the past year, how much was paid out for taxes (and homeowners insurance, if included), and what balance remains. If there is a surplus, the lender may credit it toward next year's payments or refund it to you. If there is a shortage, the lender will raise your monthly escrow payment to make up the difference.
The escrow account also typically holds money for homeowners insurance and, if applicable, private mortgage insurance (PMI). Property taxes are just one part of what your lender collects and manages through this account.
When property tax assessments change your payment
Your county or municipality reassesses property values on a schedule — often every three to five years, though this varies by location. When your home's assessed value goes up, your property tax bill increases, and so does your monthly escrow payment. Your lender will notify you of the change, usually with 30 days' notice.
If your assessed value drops, your escrow payment may decrease. You can challenge a property tax assessment if you believe it is inaccurate, but the process and timeline differ by county. Contact your local assessor's office to learn how to file a challenge in your area.
Tax rate changes also affect your payment. If your city or county raises the property tax rate, your escrow payment rises even if your home's assessed value stays the same. These changes are beyond your control, but understanding that they will happen helps you budget for them.
Paying property taxes outside of escrow
Some borrowers want to pay property taxes directly to avoid the escrow account altogether. This is possible in some situations, but lenders rarely permit it. To pay taxes outside escrow, you typically need to request a waiver of escrow from your lender, and most will only grant this if you have substantial equity in the home (often 20 percent or more) or an excellent credit history.
Even if your lender allows it, you become fully responsible for paying the tax bill on time. Missing a payment can result in penalties, interest, and a tax lien on your property. A tax lien can damage your credit and, in extreme cases, lead to foreclosure. For this reason, most lenders prefer to keep escrow in place.
If you want to explore this option, contact your lender directly and ask about their policy on escrow waivers. Be prepared to explain why you want to manage taxes yourself and to provide documentation of your financial stability.
What happens if your escrow account runs short
An escrow shortage occurs when the money you have paid into the account is not enough to cover the year's taxes and insurance. This can happen if your property was reassessed higher than expected, if tax rates increased, or if your homeowners insurance premium rose.
When a shortage is discovered during the annual escrow analysis, your lender has options. They can raise your monthly payment to cover the shortage over the next 12 months, or they can require you to pay the shortage in a lump sum. Most lenders spread it across monthly payments, but your loan documents determine which method applies.
You cannot avoid an escrow shortage by switching lenders or refinancing, because the new lender will conduct their own escrow analysis and discover the same issue. The best approach is to budget for the possibility that your monthly payment may increase.
Understanding your mortgage statement line items
A typical mortgage statement breaks down your payment into several parts. The principal and interest go toward paying down your loan. Property taxes, homeowners insurance, and PMI (if applicable) are listed separately and flow through escrow. Some statements also show HOA fees if you live in a community with a homeowners association.
The total amount due each month is the sum of all these line items. Even though property taxes are not technically part of your mortgage loan, they are part of your total monthly housing payment. Understanding this distinction helps you see where your money goes and why your payment might change even if your loan terms do not.
If your statement is unclear, contact your lender's customer service line. They can explain each line item and answer questions about upcoming changes to your payment.
Frequently Asked Questions
Can I pay my property taxes separately instead of through my mortgage?
Most lenders require escrow and do not allow separate payment. You can request a waiver, but lenders typically only grant this if you have significant home equity or excellent credit. Even then, you become responsible for paying on time or facing penalties and liens.
What if my property tax bill is higher than my lender estimated?
Your lender discovers this during the annual escrow analysis. If there is a shortage, they will raise your monthly payment to cover it, usually spreading the increase over 12 months. You will receive notice of the change at least 30 days in advance.
Does refinancing change how property taxes are handled?
When you refinance, your new lender will set up a new escrow account and conduct their own analysis of your property taxes and insurance. The process is similar to your original mortgage, though the monthly amount may differ based on current tax rates and assessed values.
Why do lenders require escrow for property taxes?
Lenders require escrow to protect their investment. If property taxes go unpaid, the county can place a lien on your home or foreclose on it, which puts the lender's loan at risk. Escrow ensures taxes are paid before they become a legal problem.
Will my escrow payment change if I make extra payments toward principal?
No. Escrow payments are based on property taxes and insurance, not on your loan balance. Extra principal payments reduce how much interest you pay over time, but they do not affect your escrow amount.