How Property Taxes Get Paid Through Escrow

What happens when your lender puts property taxes in escrow

When your mortgage lender requires property taxes in escrow, they collect a portion of your annual tax bill each month along with your mortgage payment. The lender holds this money in an escrow account and pays your county tax assessor directly when the bill comes due. You do not pay the county yourself — the lender handles it.

Most lenders require escrow for property taxes if you put down less than 20 percent, have a lower credit score, or are a first-time buyer. Some lenders offer it as an option even when it is not required. The arrangement protects the lender because it guarantees the taxes get paid; unpaid property taxes can lead to a tax lien on the home, which puts the lender's loan at risk.

The escrow amount changes each year based on your county's tax rate and your home's assessed value. When your taxes go up, your monthly payment goes up. When they go down, your payment goes down. Your lender sends you an escrow analysis statement once a year showing what they collected, what they paid out, and what your new monthly amount will be.

Key Takeaways

• Your lender collects one-twelfth of your annual property tax bill each month and pays your county directly when taxes are due.
• Escrow is required by most lenders for borrowers with less than 20 percent down, but some lenders offer it as an option regardless.
• Your monthly escrow payment changes annually based on your county's tax rate and your home's assessed value.
• You receive an escrow analysis statement each year showing collections, payments, and your new monthly amount.
• If your escrow account runs short, your lender may require you to pay the difference or increase your monthly payment.

How lenders calculate your monthly escrow payment

Your lender takes your annual property tax bill, divides it by 12, and adds that amount to your monthly mortgage payment. The calculation is straightforward, but the number changes every year because property taxes change.

When your county reassesses your home's value or raises the tax rate, your annual bill increases. Your lender recalculates your escrow payment and notifies you of the new amount. If your taxes drop, your payment drops. Some lenders build in a small cushion — typically 10 to 20 percent extra — to cover unexpected increases, so your payment may be slightly higher than one-twelfth of your bill.

Your lender sends the escrow analysis statement in advance of the change, usually 30 to 45 days before your new payment takes effect. This statement shows your old payment, your new payment, and the reason for the change. If you disagree with the amount, you can contact your lender to review the calculation, though the lender's math is usually based on official county records.

When escrow accounts run short or have a surplus

An escrow shortage happens when the lender collected less money than needed to pay your taxes. This can occur if your county raised taxes mid-year, your home was reassessed higher than expected, or the lender underestimated the bill. When a shortage occurs, your lender has three options: charge you a lump sum to cover it, spread the shortage across your next 12 monthly payments, or require you to pay it back over time.

A surplus happens when the lender collected more than necessary. Your lender must return the overage to you within 30 days of the escrow analysis, though some lenders apply it to your next month's payment instead. Federal law requires lenders to return surpluses above $50, though some states have lower thresholds.

If your account runs short repeatedly, your lender may increase your monthly escrow payment permanently to build a larger cushion. This protects them but also means you pay more each month. You can ask your lender to review whether the cushion is necessary or if it can be reduced.

Requesting escrow removal or opting out

If your lender does not require escrow, you can ask to remove it or decline it from the start. Removing escrow means you pay your property taxes directly to your county instead of through your lender. Your monthly mortgage payment drops because the tax portion is removed.

To remove escrow, you typically need at least 20 percent equity in your home and a good payment history with your lender. Some lenders require a written request; others allow you to request removal during your annual escrow analysis. The process usually takes 30 to 60 days. Once removed, you become responsible for paying your county tax bill on time — missing a payment can result in penalties, interest, or a tax lien.

If you remove escrow and later want it back, most lenders will reinstate it, though some charge a fee. Reinstating escrow is useful if you are worried about remembering to pay taxes on time or if your financial situation changes and you want the lender to handle it again.

What to do if you disagree with your escrow amount

If your escrow analysis statement shows an amount you believe is wrong, contact your lender's escrow department directly. Bring your county property tax bill and ask the lender to show you the calculation. Common errors include using an outdated tax rate, miscalculating the annual bill, or applying an incorrect cushion percentage.

Your lender is required to investigate your dispute within a reasonable time frame — usually 30 to 45 days. If the lender made an error, they will recalculate and adjust your payment. If the calculation is correct but based on new county information you were not aware of, the lender can explain what changed. Disputes are rare because lenders pull tax information directly from county records, but mistakes do happen.

If you cannot resolve the dispute with your lender, you can file a complaint with your state's banking regulator or the Consumer Financial Protection Bureau. Keep copies of all correspondence, your tax bills, and the escrow analysis statements you received.

How escrow affects your mortgage payoff

Escrow does not change when your mortgage ends. On your final payment, your lender collects the last month's escrow amount along with your principal and interest. After that, you are responsible for paying property taxes directly to your county for as long as you own the home.

If you sell your home before the mortgage is paid off, the escrow account is closed at closing. Any surplus is returned to you; any shortage is deducted from your proceeds. The title company or closing agent handles this as part of the closing statement. The new owner and their lender will set up their own escrow account based on the new loan terms.

Frequently Asked Questions

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

Only if your lender does not require it. Most lenders require escrow for borrowers with less than 20 percent down. If your lender allows it, you can request removal once you have built enough equity and have a good payment history. After removal, you pay your county directly.

What happens if my lender forgets to pay my property taxes?

This is rare because lenders are legally required to pay on time. If it happens, the lender is responsible for penalties and interest, not you. Contact your lender immediately and ask for proof of payment. If taxes were not paid, the lender must pay them plus any late fees that resulted from their error.

Why did my escrow payment go up so much?

Your county likely reassessed your home's value or raised the tax rate. Check your county assessor's website to see your new assessed value and tax rate. Your lender's escrow analysis statement should explain the change. If you believe the assessment is wrong, you can file an appeal with your county assessor.

Do I get a refund if I pay off my mortgage early?

Yes. When you pay off your mortgage, your lender closes the escrow account and refunds any surplus. The amount depends on how much was collected versus how much was paid out. This refund is typically sent within 30 to 45 days after payoff.

Can my lender invest my escrow money?

No. Federal law prohibits lenders from earning interest on escrow accounts. The money must sit in a non-interest-bearing account and be used only to pay your taxes and insurance. Some states allow lenders to hold a small amount of interest, but most do not.