Real estate tax is not automatically included in your mortgage payment, but your lender can require you to pay it through an escrow account
When you take out a mortgage, you owe two separate debts: the loan itself and the property tax bill from your local government. Your lender has no legal claim to your tax money—the county or municipality does. However, most lenders require you to set aside money each month in an escrow account so they can pay your property taxes and homeowners insurance on your behalf when those bills come due. This protects the lender's investment in the property.
Whether your taxes are included in your monthly payment depends on your loan agreement and your lender's policy. Some mortgages bundle the tax payment into one monthly bill; others keep it separate. Either way, you are paying for the taxes—the question is whether the money moves through your lender or you send it directly to the county.
Key Takeaways
- Property taxes are a separate obligation from your mortgage and are owed to your local government, not your lender.
- Most lenders require an escrow account where you deposit money monthly to cover taxes and insurance, which the lender pays when bills arrive.
- Your monthly mortgage statement usually shows the escrow portion separately from principal and interest, even if it is bundled into one payment.
- If you pay off your mortgage early or refinance, your escrow account is closed and any remaining balance is returned to you.
- Some lenders allow you to waive escrow if you have a large down payment and strong credit, but you then pay taxes directly to the county.
How escrow accounts work in a mortgage
When you close on a home, your lender calculates your annual property tax bill and divides it by 12. That amount is added to your monthly mortgage payment and held in escrow. The same happens with homeowners insurance. So if your property tax is $2,400 per year, you pay $200 per month into escrow; if insurance is $1,200 per year, you pay $100 per month.
Twice a year (or when bills arrive), your lender pays the county and insurance company directly from the escrow account. You never handle the check or see the bill—the lender manages it. This arrangement exists because lenders want certainty that taxes will be paid; if you fell behind on taxes, the county could place a lien on the property and foreclose, wiping out the lender's security.
Your monthly mortgage statement breaks down what you owe: principal, interest, property tax escrow, and insurance escrow. Even if your bank combines them into one payment, the statement shows each piece separately so you can see where your money goes.
What happens if your tax bill changes
Property tax assessments are not fixed. If your county reassesses your home's value or raises the tax rate, your annual bill will increase. Your lender will recalculate your monthly escrow payment and adjust it upward, usually with 30 days' notice. You will see this as a jump in your monthly mortgage bill.
Conversely, if your assessment drops or the tax rate falls, your escrow payment may decrease. At the end of each year, your lender reviews the escrow account. If there is a surplus (you paid more than was needed), the lender either credits it toward next year's payments or refunds it to you. If there is a shortfall, you may owe a lump sum or the lender will spread it across future payments.
This annual true-up is required by law in most states. Your lender will send you an escrow analysis statement showing the calculation. Read it carefully—errors do happen, and you have the right to dispute the amount if the math is wrong.
When you can skip escrow and pay taxes yourself
Some lenders allow borrowers to waive the escrow requirement if you meet certain conditions: typically a down payment of 20 percent or more and a credit score above a set threshold (often 740 or higher). If you waive escrow, you pay property taxes directly to your county assessor's office on their schedule, usually twice a year. Your mortgage payment then covers only principal, interest, and insurance.
Waiving escrow gives you control over the money and can save you a small amount if you invest the funds instead of letting them sit in a non-interest-bearing escrow account. However, it also means you must remember to pay the tax bill on time. Missing a property tax payment can result in penalties, interest, and eventually a tax lien or foreclosure—even if you have never missed a mortgage payment.
If you choose to waive escrow and later fall behind on taxes, your lender may force you back into escrow at any time. Some lenders also require escrow if you refinance, regardless of your previous arrangement.
What happens to escrow when you sell or refinance
When you sell your home and pay off the mortgage, your lender closes the escrow account. Any money left in it—the portion you prepaid for taxes and insurance that have not yet been billed—is refunded to you, usually within 30 to 45 days. The new owner and their lender will set up their own escrow account based on the new purchase price and assessed value.
If you refinance with the same lender, they may transfer the escrow balance to your new loan. If you refinance with a different lender, the old lender refunds the balance and the new lender opens a fresh escrow account. The new calculation may be higher or lower depending on current tax rates and your home's new assessed value (if the appraisal changes it).
Reading your mortgage statement to find the tax portion
Your monthly statement from your lender breaks down the payment into components. Look for a line item labeled "property tax escrow," "tax and insurance," or "PITI" (principal, interest, taxes, insurance). This shows exactly how much of your payment goes toward taxes each month.
If you pay $1,500 per month and the statement shows $300 in escrow, then $1,200 covers principal and interest. The escrow portion is not building equity in your home—it is money set aside for a bill you owe to the government. Understanding this distinction helps you budget and plan for changes if tax rates rise.
Why lenders require escrow and what it costs you
Lenders require escrow because property tax liens take priority over mortgage liens. If you stop paying taxes, the county can foreclose and sell the property to pay the debt, leaving the lender with nothing. By controlling the escrow account, the lender ensures taxes are paid before you can default on them.
The downside is that your money sits in an escrow account earning little or no interest while the lender holds it. Over the life of a 30-year mortgage, this can add up. Some states require lenders to pay interest on escrow balances, but the rate is often very low—sometimes just 0.01 percent. You have no choice in how the money is invested.
Additionally, if your lender miscalculates the escrow amount, you may face a shortage at year-end and have to pay a lump sum. This is rare but does happen, which is why reviewing your escrow analysis statement each year is important.
Frequently Asked Questions
Can I pay my property taxes separately even if my lender requires escrow?
No. If your loan agreement requires escrow, you must pay taxes through the escrow account. You cannot opt out unilaterally. However, if you refinance or your lender's policy changes, you may be able to request a waiver if you meet their criteria.
What if my escrow account runs short and there is not enough money to pay the tax bill?
Your lender will cover the shortfall and then adjust your monthly escrow payment upward to replenish the account. You will owe the lender back for the money they advanced, either as a lump sum or spread over future payments. This is why the annual escrow analysis is important—it catches shortfalls before they happen.
Does paying through escrow affect my credit score?
No. Escrow is straightforward a payment arrangement between you and your lender. As long as you make your full mortgage payment on time each month, your credit is unaffected. The lender pays the tax bill, so the county has no reason to report you to credit bureaus.
If I pay off my mortgage early, do I get my escrow money back?
Yes. When you pay off the loan, the lender closes the escrow account and refunds any remaining balance within 30 to 45 days. You will also need to pay any property taxes that come due after the mortgage is paid off directly to the county.
Why did my escrow payment go up if my property taxes did not change?
Your lender may have discovered a shortfall in the previous year's escrow analysis and is spreading the cost across future payments. Alternatively, your homeowners insurance premium may have increased, which also goes into escrow. Check your escrow analysis statement to see the breakdown.