Property tax is not automatically included in your mortgage payment, but your lender can require you to pay it through escrow
Your mortgage payment covers the loan principal and interest. Property tax is a separate bill that your local government sends you directly. However, if your lender requires an escrow account — and most do — you pay property tax as part of your monthly mortgage payment. The lender collects the money, holds it in escrow, and pays the tax bill when it comes due.
Whether escrow is required depends on your down payment. If you put down less than 20 percent, your lender almost always requires it. If you put down 20 percent or more, escrow may be optional, though some lenders still require it. Even when optional, many borrowers choose escrow because it spreads the large annual tax bill into smaller monthly chunks.
The escrow amount is an estimate based on your property's assessed value and your local tax rate. Your lender adjusts it once a year when the actual tax bill arrives. If you overpaid, you get a credit toward next year's escrow. If you underpaid, your monthly payment goes up slightly to catch up.
Key Takeaways
- Property tax is a separate bill from your mortgage, but most lenders require you to pay it through an escrow account built into your monthly payment.
- Escrow is almost always required if your down payment is less than 20 percent, and optional if it is 20 percent or more.
- Your lender estimates the escrow amount based on your property tax assessment and adjusts it annually when the actual bill arrives.
- Homeowners insurance is also often included in escrow the same way as property tax.
- You can request to remove escrow once you have built enough equity, but your lender must agree and you remain responsible for paying the tax bill yourself.
How escrow works in your monthly payment
When you have an escrow account, your monthly mortgage payment has four parts: principal, interest, property tax, and homeowners insurance. This is called a PITI payment (Principal, Interest, Taxes, Insurance). The lender collects all four amounts each month.
The lender divides your annual property tax bill by 12 and adds that amount to each month's payment. For example, if your annual property tax is $2,400, the lender adds $200 to your monthly payment. The same happens with homeowners insurance. You never write a separate check to the tax assessor or the insurance company — the lender handles both.
This arrangement protects the lender. If you fell behind on property tax, the government could place a lien on the house and eventually foreclose, which would wipe out the lender's security. By collecting the money upfront and paying the bills themselves, lenders avoid that risk.
When your lender requires escrow versus when it is optional
Escrow requirements depend on your loan-to-value ratio (LTV), which is the loan amount divided by the home's purchase price or appraised value, whichever is lower. If you borrow 80 percent or less of the home's value — meaning you put down 20 percent or more — escrow is usually optional. If you borrow more than 80 percent, escrow is almost always required.
Lenders treat high-LTV loans as riskier because you have less equity in the home. Requiring escrow is their way of ensuring the property tax and insurance stay current. Some lenders require escrow on all loans regardless of down payment, so check your loan documents or ask your lender directly.
Even when escrow is optional, many borrowers keep it because the alternative — paying a large property tax bill once or twice a year out of pocket — is harder to budget for. Spreading it across 12 months makes the cost more predictable.
How your escrow amount is calculated and adjusted
Your lender estimates your escrow payment based on the property tax assessment and insurance premium at the time you close. They divide the annual amounts by 12 and add them to your monthly payment. This is an estimate, not the final number.
Once a year, usually in the fall or winter, your lender reviews the actual property tax bill and insurance renewal. If the real numbers are higher than the estimate, your monthly payment increases. If they are lower, your payment decreases or you receive a credit. Some lenders also conduct a mid-year review if property taxes spike unexpectedly.
Your lender will send you an escrow analysis statement showing the old estimate, the actual bills paid, and the new monthly amount. Read this carefully. If you disagree with the calculation, you can ask the lender to review it, though the lender's math is usually correct.
What happens if your property tax or insurance changes
Property tax can increase when your local government reassesses your home's value or raises the tax rate. Insurance premiums rise when you file a claim, when your insurer raises rates across the board, or when you add coverage. Either change flows into your escrow account and raises your monthly payment.
You cannot avoid these increases by dropping escrow — you still owe the tax and insurance. If you drop escrow and then miss a payment, your lender can foreclose. The escrow account straightforward ensures the bills get paid on time, whether you remember to pay them or not.
If your property tax jumps sharply — because of a reassessment, for example — your lender may spread the increase over several months rather than raising your payment all at once. Ask about this if you receive a large escrow adjustment.
Removing escrow once you have built equity
Once your loan balance drops to 80 percent or less of your home's current value, you may be able to request that your lender remove the escrow requirement. This is called escrow waiver or impound waiver. Your lender is not required to grant it, but many will if you have a good payment history and meet their other conditions.
If your lender agrees, your monthly payment drops because you no longer pay property tax and insurance through them. You become responsible for paying these bills yourself — directly to the tax assessor and insurance company. This saves money only if you can reliably set aside the funds and pay on time. Missing either payment can result in tax liens, foreclosure, or a lapsed insurance policy.
To request escrow removal, contact your lender's loan servicing department. They will tell you whether you may have access to and what documentation they need. The process usually takes a few weeks.
The difference between escrow and impound accounts
Escrow and impound are the same thing — different lenders use different names. Both refer to an account where the lender holds money for property tax and insurance. Some states use "escrow" more commonly, others use "impound." The mechanics are identical.
Do not confuse this with the escrow account used during the home purchase, where a neutral third party holds your down payment and earnest money until closing. That is a different escrow account that closes after you sign the deed. The escrow account for property tax and insurance is ongoing and lasts as long as you own the home and have a mortgage.
Frequently Asked Questions
Can I pay my property tax separately instead of through escrow?
Only if your lender allows it. If your down payment is less than 20 percent, your lender almost certainly requires escrow and will not let you opt out. If your down payment is 20 percent or more, ask your lender whether escrow is optional. Even if it is optional, many lenders discourage it because they want to may support the tax bill gets paid.
What if my escrow account runs out of money?
Escrow accounts do not run out of money in the way a checking account does. If your estimate was too low and the actual tax bill is higher, your lender covers the shortage and raises your next monthly payment to replenish the account. You are responsible for the difference, but it is spread across future payments rather than due all at once.
Does escrow mean I do not have to worry about property tax important date?
Correct. Your lender pays the bill on time, so you do not have to track the important date or write a check. However, you are still responsible for the debt — if the lender fails to pay (which is rare), you could face penalties. Review your escrow analysis statement each year to confirm the lender paid the correct amount.
Will my escrow payment change if I refinance?
Yes. When you refinance, your new lender calculates a new escrow estimate based on the new loan amount and the current property tax and insurance. The new payment may be higher or lower depending on how much you borrowed and how much your tax and insurance have changed since your original loan.
What if I pay off my mortgage early?
Once you pay off the loan, the escrow account closes. Your lender will send you any remaining balance, usually within 30 to 45 days. After that, you are responsible for paying property tax and homeowners insurance directly to the tax assessor and insurance company.