Real estate tax is not automatically included in your mortgage payment, but your lender can require you to pay it through escrow
When you get a mortgage, your monthly payment covers the loan principal and interest. Real estate tax — the property tax your local government assesses — is separate. However, many 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 means you may be paying real estate tax as part of your monthly mortgage bill, even though it is not technically part of the loan itself.
Whether your lender requires escrow depends on your down payment size and the lender's own rules. If you put down less than 20 percent, most lenders will require an escrow account. If you put down 20 percent or more, escrow is usually optional — you can choose to pay property taxes and insurance yourself. Some lenders require escrow regardless of down payment. You should find out your lender's policy before closing.
Key Takeaways
- Real estate tax is a separate bill from your mortgage, but many lenders require you to pay it through an escrow account that is funded by your monthly mortgage payment.
- Escrow accounts also typically hold money for homeowners insurance and sometimes mortgage insurance, so your monthly payment covers more than just the loan itself.
- Lenders usually require escrow if your down payment is less than 20 percent, and may require it regardless of down payment size.
- The amount set aside for taxes and insurance changes each year based on what your local government and insurance company actually bill you.
- You can request to remove escrow once you have built enough equity, but the lender must agree and you become responsible for paying taxes and insurance directly.
How escrow accounts work with your mortgage payment
When your lender requires escrow, your monthly mortgage payment is divided into four parts: principal, interest, property tax, and insurance. The principal and interest go toward paying down your loan. The property tax and insurance portions go into a separate escrow account held by your lender or a third-party escrow company.
Your lender estimates how much you will owe in property taxes and insurance over the next year, divides that by 12, and adds that amount to your monthly payment. When your property tax bill arrives, the lender pays it from the escrow account. When your homeowners insurance premium is due, the lender pays that too. You never see the bill or write the check — the lender handles it.
The escrow amount is not fixed. Every year, usually in the fall, your lender reviews what you actually paid in taxes and insurance and recalculates the monthly amount. If taxes went up, your monthly payment goes up. If they went down, your payment may go down. You will receive a statement showing the escrow account activity and the new monthly amount.
What happens if your escrow account runs short
Sometimes the money in escrow is not enough to cover the actual bills. This can happen if your property tax increased more than the lender predicted, or if your insurance company raised your premium. When this occurs, you have a shortfall.
Your lender will notify you of the shortfall and give you options: you can pay the difference in a lump sum, or the lender can spread it across your next 12 monthly payments by raising your payment amount. Most borrowers choose to spread it out. The lender cannot force you to pay a shortfall when ready, but they can add it to your loan balance or require you to pay it before they will remove escrow from your account.
When you can remove escrow from your mortgage
If your down payment was less than 20 percent and escrow was required, you may be able to remove it once you have paid down your loan enough. The threshold is usually when your loan balance drops to 80 percent of the home's original purchase price, though some lenders use the current home value instead. You will need to request the removal in writing and the lender must agree.
Once escrow is removed, you become responsible for paying property taxes and insurance directly. You will no longer have those amounts added to your mortgage payment, so your monthly bill will drop. However, you must now track the due dates yourself and make sure the payments are made on time. If you miss a property tax payment, the local government can place a lien on your home. If you miss insurance, your lender can buy insurance on your behalf and charge you for it.
Some lenders will not remove escrow even if you ask. Others will remove it only if you pay a fee or meet additional requirements, such as maintaining a certain credit score. Check your loan documents or call your lender to find out their policy.
The difference between escrow and impound accounts
You may hear the terms "escrow account" and "impound account" used interchangeably. In the mortgage world, they mean the same thing: a lender-controlled account that holds money for taxes and insurance. The term used depends on the region and the lender's preference. California and some other states tend to use "impound," while other areas use "escrow." The mechanics are identical.
Do not confuse a mortgage escrow account with an escrow account used during a home purchase. During closing, a separate escrow account temporarily holds the down payment and earnest money until the sale is complete. That is a different process and a different account.
What property taxes actually cover
Property taxes fund local services: schools, roads, fire departments, police, libraries, and county government. The amount you owe is set by your local assessor based on your home's assessed value, not its market value. The tax rate varies widely by location — a home worth $300,000 might have a $3,000 annual tax bill in one county and a $6,000 bill in another.
Your property tax bill arrives once or twice a year, depending on where you live. If your lender requires escrow, you never see the bill directly. If you do not have escrow, the tax bill comes to you and you must pay it by the important date or face penalties and interest.
Mortgage insurance and escrow
If your down payment was less than 20 percent, your lender also required you to buy private mortgage insurance (PMI). The PMI premium is often added to your monthly mortgage payment, and if you have escrow, the lender may collect the PMI payment through the escrow account as well. This means your monthly payment could include principal, interest, property tax, homeowners insurance, and PMI — five separate components.
PMI can be removed once your loan balance reaches 80 percent of the home's value, though you must request it. Some lenders remove it automatically. Once PMI is gone, that portion of your payment disappears, lowering your monthly bill.
Frequently Asked Questions
Can I pay my property taxes myself instead of through escrow?
Only if your lender allows it. If escrow is required — usually because your down payment was under 20 percent — you cannot opt out. Once you have built equity and the lender agrees to remove escrow, you can pay taxes yourself. If you choose to do so, mark the tax due date on your calendar and pay before the important date to avoid penalties.
What if I disagree with my property tax assessment?
You can challenge your assessment through your local assessor's office, usually by filing a formal appeal within a set time window. The process and important date vary by location. Even if you win a reduction, it may not take effect until the next tax year, so your escrow payment might not change when ready. Contact your county assessor for details on how to appeal.
Does my escrow account earn interest?
Escrow accounts typically do not earn interest. Your lender holds the money in a non-interest-bearing account. Some states require lenders to pay interest on escrow balances, but the rate is usually very low. Check your loan documents or ask your lender whether your state requires interest payments.
What happens to my escrow account if I sell my home?
When you sell, the closing agent pays off your mortgage and any remaining escrow balance is returned to you. If there is a shortfall, you must pay it at closing. The new owner will set up their own escrow account with their lender based on their loan terms.
Can my property tax bill change after I lock in my mortgage rate?
Yes. Your mortgage interest rate is fixed, but property taxes are not. Local governments reassess property values and can raise tax rates independently of your mortgage terms. If your taxes increase, your escrow payment will increase at the next annual review, even though your mortgage rate stays the same.