Yes, escrow typically pays your property taxes, but only if your lender requires it

When you have a mortgage with an escrow account, your lender collects money from you each month to cover property taxes, homeowners insurance, and sometimes mortgage insurance. The lender then pays these bills on your behalf when they come due. This is not optional if you put down less than 20 percent on your home — most lenders require it. If you put down 20 percent or more, your lender may allow you to pay property taxes directly to your county instead.

The escrow account works like this: your monthly mortgage payment includes a base amount for principal and interest, plus an additional amount calculated to cover one-twelfth of your annual property tax bill. The lender holds this money in a separate account and pays the full bill when the tax bill arrives. You never write a check to the county yourself — the lender handles it.

Key Takeaways

  • Escrow accounts pay property taxes automatically if your down payment was less than 20 percent, because your lender requires it.
  • Your monthly escrow payment is one-twelfth of your estimated annual property tax bill, plus insurance and mortgage insurance if applicable.
  • If your property taxes increase, your lender will recalculate your escrow payment and it will go up at your next annual review.
  • You can request to remove escrow once you have built 20 percent equity in your home, but you then pay property taxes directly to your county.
  • Escrow accounts are not savings accounts — any money left over after bills are paid stays with the lender, not returned to you.

How your lender calculates the escrow payment

Your lender estimates what your property taxes will be for the year and divides that number by 12. That becomes the tax portion of your monthly payment. The same calculation happens for homeowners insurance and, if you are putting down less than 20 percent, private mortgage insurance (PMI). All three amounts are added together and collected from you each month.

The lender does not know your exact tax bill when you close on the home, so it uses the assessed value from the county assessor's office or the previous owner's bill as a starting point. This estimate is often close but not exact. If your county reassesses your home and the tax goes up, your escrow payment will increase at the next annual review — usually on your mortgage anniversary or at the start of the calendar year, depending on your lender's schedule.

You will receive an escrow analysis statement once a year. This document shows what the lender collected from you, what it paid out for taxes and insurance, and whether there is a shortage or surplus. A shortage means you owe more; a surplus means the lender collected too much. Surpluses are typically applied to your next year's escrow account, not returned to you as a refund.

What happens when property taxes increase

Property taxes are set by your county or municipality and can change year to year based on reassessment, tax rate changes, or bond measures. When your taxes go up, your lender will discover this during the annual escrow analysis. The lender will recalculate your monthly payment to account for the higher bill and notify you of the increase.

This increase is not optional — if you have an escrow account, you must pay the higher amount. You cannot choose to pay the old amount and make up the difference later. The only way to avoid this is to remove escrow entirely, which requires you to have at least 20 percent equity in your home and to request it in writing. Once escrow is removed, you pay property taxes directly to your county on the schedule they set, and you are responsible for paying on time.

Removing escrow once you have equity

If you have paid down your mortgage to the point where you own at least 20 percent of the home's value, you can ask your lender to remove the escrow requirement. This means you will no longer have an escrow account, and you will pay property taxes directly to your county. Your monthly mortgage payment will drop because the tax portion is removed.

To request escrow removal, contact your lender's loan servicing department in writing. Some lenders allow this request online through your account portal. The lender will verify your equity using the current home value, which may require an appraisal. If the lender approves, you will receive a new payment schedule and instructions on how to pay your property taxes on your own.

Be aware that once you remove escrow, you are entirely responsible for paying your property taxes on time. If you miss a payment, the county can place a lien on your home or start foreclosure proceedings. Many homeowners keep escrow for this reason — it removes the risk of forgetting a payment.

What escrow does not cover

Escrow accounts pay property taxes and homeowners insurance. They do not pay income taxes, state taxes, or any other tax you might owe personally. If you are self-employed or have investment income, you are responsible for paying those taxes separately to the IRS or your state revenue department.

Escrow also does not cover HOA fees if you live in a homeowners association community. Some lenders offer to collect HOA fees in escrow, but this is optional and must be requested. If your lender does not collect HOA fees, you pay them directly to the HOA each month or quarter.

Common mistakes to avoid with escrow accounts

The biggest mistake is assuming an escrow surplus is money you will get back. When the lender collects more than needed and has a surplus, that money stays in the escrow account to cover future bills. You will not receive a check. The lender may explore it to next year's account or use it to offset a shortage, but it is not refunded to you.

Another mistake is ignoring escrow analysis statements. These arrive once a year and show whether your payment is about to increase. If you do not read it, you may be surprised by a higher mortgage payment. Set a reminder to review it when it arrives so you can budget for any changes.

A third mistake is removing escrow without understanding the responsibility. Once you remove it, you must track your property tax due dates and pay the county directly. If you miss a important date, the consequences are serious — liens and foreclosure are real. Only remove escrow if you are confident you will remember to pay on time.

Frequently Asked Questions

Can I pay my property taxes myself instead of through escrow?

Only if you have at least 20 percent equity in your home and your lender approves the removal. If you have less than 20 percent down, your lender requires escrow. Contact your lender to request removal in writing and provide proof of your equity.

What if my escrow account does not have enough money to pay the tax bill?

This is called a shortage. Your lender will notify you and typically add the shortage amount to your next few monthly payments to build the account back up. You may also be offered a lump-sum payment option to cover it when ready.

Do I get interest on money sitting in my escrow account?

No. Escrow accounts are non-interest-bearing. The money you contribute each month sits in the account earning nothing until the lender pays out your taxes and insurance. This is standard across all lenders.

What happens to my escrow account if I sell my home?

When you sell, the lender pays off your mortgage and closes the escrow account. Any surplus in the account is returned to you at closing as part of your final settlement statement. Any shortage is deducted from your proceeds.

Can my property tax escrow payment change mid-year?

Normally escrow payments are recalculated once a year. However, if your county reassesses your home mid-year and the tax changes significantly, some lenders may adjust your payment before the annual review. Check your mortgage documents or contact your lender to understand their policy.