Yes, escrow typically pays your property taxes, but only if you have an escrow account
When you have a mortgage, your lender often requires you to set up an escrow account—a separate account held by your mortgage servicer that collects money from you each month and pays certain bills on your behalf. Property taxes are one of the main things escrow pays. Your monthly mortgage payment includes an estimated portion for taxes, and the servicer holds that money until the tax bill is due, then pays the taxing authority directly.
The catch is that escrow is not automatic for every homeowner. If you own your home outright with no mortgage, you pay property taxes yourself. If you have a mortgage but made a large down payment (usually 20 percent or more), your lender may not require escrow. And if you do have escrow, the amount the servicer estimates you owe may not match what you actually owe—which can leave you with a shortage or a surplus at the end of the year.
Key Takeaways
- Escrow accounts collect a portion of your monthly mortgage payment and pay property taxes directly to your county or municipality when they are due.
- Your lender estimates how much you owe in taxes each year and divides that by 12 to set your monthly escrow payment, so the estimate may be too high or too low.
- If you have a mortgage with less than 20 percent down, your lender usually requires escrow; if you put down 20 percent or more, you may have the option to skip it.
- If escrow does not collect enough money to cover your tax bill, you will owe the difference; if it collects too much, you receive a refund or credit.
How escrow collects and pays your property taxes
Your mortgage servicer estimates your annual property tax bill based on your home's assessed value and your local tax rate. They divide that estimate by 12 and add that amount to your monthly mortgage payment. That money goes into the escrow account, where it sits until your property tax bill is due—usually once or twice a year depending on your county.
When the bill comes due, the servicer pays the taxing authority (your county assessor's office or tax collector) directly from the escrow account. You do not write a check or manage the payment yourself. The servicer sends you a statement showing what was collected, what was paid, and what balance remains in the account.
This arrangement protects the lender: they know the property taxes will be paid on time, because if they are not, the home can be sold at a tax sale and the lender's mortgage becomes worthless. It also simplifies things for you—one payment covers your principal, interest, taxes, and often homeowners insurance all at once.
When escrow estimates are wrong and what happens next
Escrow estimates are based on last year's tax bill, but property taxes change. Your home may be reassessed, your local tax rate may increase, or you may have appealed your assessment. If your actual tax bill is higher than what escrow collected, you will owe the difference. Your servicer will notify you of the shortage and may raise your monthly escrow payment to make up for it over time, or ask you to pay the shortage in a lump sum.
If your actual tax bill is lower than the estimate, you have a surplus. Some servicers refund the overage to you; others credit it toward next year's escrow payments. Check your escrow statement to see which approach your servicer uses.
You can request an escrow analysis from your servicer once a year. This is a formal review of what you paid versus what you owed, and it is free. If the analysis shows a significant shortage or surplus, the servicer must adjust your monthly payment. Federal law limits how much surplus can be held in escrow—usually no more than two months' worth of payments.
Who is required to have escrow and who can skip it
If your down payment was less than 20 percent of the home's purchase price, your lender almost certainly requires escrow. This is because the loan is considered higher-risk, and the lender wants assurance that taxes and insurance will be paid. You do not have a choice in this case.
If you put down 20 percent or more, many lenders will let you waive escrow. You would then pay your property taxes and homeowners insurance directly to the taxing authority and insurance company. Some lenders charge a small fee to waive escrow, and some do not. Ask your lender what their policy is before closing.
If you refinance your mortgage, your new lender may have different escrow requirements. A cash-out refinance or a refinance that lowers your equity below 20 percent may trigger a new escrow requirement, even if you did not have one before.
What to do if you think your escrow payment is wrong
Start by reviewing your escrow statement, which your servicer is required to send you once a year. It shows the opening balance, deposits made, payments sent out, and the closing balance. Compare the property tax payment to your actual tax bill from your county. If there is a large discrepancy, contact your servicer.
Ask your servicer to run an escrow analysis. Provide them with a copy of your current property tax bill if you have one. If the analysis shows an error—for example, the servicer used an outdated tax rate or missed a recent assessment change—they must correct it and adjust your payment going forward.
If you believe your property tax assessment itself is wrong (not the escrow calculation, but the amount the county says you owe), that is a separate issue. You would file an appeal with your county assessor's office, not your mortgage servicer. Once your appeal is resolved, notify your servicer so they can update their escrow estimate.
What happens to escrow if you sell or refinance
When you sell your home, the escrow account is closed at closing. Any remaining balance is refunded to you, usually within a few weeks. The title company or closing agent handles this as part of the closing settlement. Make sure your closing disclosure shows the escrow refund amount so you know what to expect.
If you refinance, your old lender closes the escrow account and refunds any balance. Your new lender may open a new escrow account, depending on their requirements and your new loan-to-value ratio. The new servicer will estimate your taxes and insurance based on current amounts, not what you were paying before.
Escrow versus paying taxes yourself
If you have the option to waive escrow, you need to decide whether managing your own tax and insurance payments is worth it. The advantage is that you keep the money in your own account and earn interest on it until the bill is due. The disadvantage is that you have to remember to pay on time, and if you miss a important date, you may face penalties and interest.
Some people prefer escrow because it forces them to save for taxes and insurance automatically. Others prefer to waive it because they want control over their money. There is no right answer—it depends on your comfort level with managing bills and your financial situation.
Frequently Asked Questions
Can I pay my property taxes myself even if I have an escrow account?
No. If your lender requires escrow, you cannot pay the taxes directly to the county. The servicer must pay them from the escrow account. If you want to pay your own taxes, you would need to refinance with a lender that does not require escrow, which usually means putting down at least 20 percent equity.
What if my escrow account runs out of money before the tax bill is due?
The servicer is responsible for paying the bill on time, even if the account is short. They will cover the shortage and bill you for it, or adjust your monthly payment to recover it. You will not face a late penalty because the servicer, not you, is the one making the payment.
How often does my escrow payment change?
Your servicer must review escrow once a year and adjust your payment if needed. Changes usually happen when property taxes or insurance premiums increase, or when an escrow analysis shows a significant shortage or surplus. You will receive notice of any change before it takes effect.
Do I get interest on money sitting in my escrow account?
Escrow accounts rarely earn interest. Some states require servicers to pay interest on escrow balances, but the rate is usually very low. Check your state's laws or ask your servicer whether interest is paid on your account.
What if I disagree with my property tax assessment?
Contact your county assessor's office to file an appeal. This is separate from your escrow account. Once your appeal is resolved and your assessment changes, notify your servicer so they can adjust the escrow estimate for the following year.