Property taxes are usually not part of your mortgage payment, but your lender may collect them through escrow
Your mortgage payment itself—the amount you owe the lender for borrowing the money—does not include property taxes. Property taxes go to your local government, not your lender. However, most lenders require you to pay property taxes through an escrow account, which means the lender collects a portion each month, holds it, and pays the tax bill on your behalf when it comes due.
This setup protects the lender: if you stopped paying property taxes, the government could foreclose on the house, and the lender's loan would be at risk. So lenders build an escrow requirement into most mortgages. Your monthly payment statement will show the mortgage principal and interest separately from the escrow deposit, even though you send one check or make one online payment.
Some mortgages do not require escrow—usually only if you have a large down payment, excellent credit, or a loan from a portfolio lender (one that keeps the loan rather than selling it). Even then, you remain responsible for paying property taxes on time; the lender just does not collect them for you.
Key Takeaways
- Property taxes are a separate obligation to your local government and are not part of the mortgage principal and interest you owe the lender.
- Most lenders require an escrow account, which means you pay a monthly escrow deposit that the lender holds and uses to pay your property tax bill when due.
- Your mortgage statement will itemize the principal, interest, and escrow deposit as separate line items, even though you make one payment.
- If your lender does not require escrow, you must pay property taxes directly to your county or municipality on your own schedule.
- Property tax amounts vary by location and are reassessed periodically, so your escrow deposit may increase or decrease over time.
How escrow accounts work for property taxes
When you close on a mortgage, the lender estimates your annual property tax bill based on the assessed value of the home and your local tax rate. The lender divides that estimate by 12 and adds that amount to your monthly payment. This money goes into an escrow account held by the lender or a third-party escrow company, not into your personal savings account.
Twice a year (or on whatever schedule your local government uses), the property tax bill arrives. The lender pays it directly from the escrow account. You never see the bill or write a check for it—the lender handles the transaction. At the end of the year, the lender reconciles what was actually paid against what you deposited. If you overpaid, you may receive a refund or a credit toward next year's escrow. If you underpaid, the lender will increase your monthly escrow deposit.
This system means your escrow deposit is not fixed. If your home is reassessed and property taxes rise, your lender will recalculate and raise your monthly escrow payment. Conversely, if taxes fall or you make improvements that lower your assessed value, your payment may decrease. Lenders are required to send you an escrow analysis statement at least once a year showing what was collected, what was paid, and what your new monthly deposit will be.
When property taxes are not collected through escrow
If your lender does not require escrow—which is rare—you are responsible for paying property taxes directly to your county assessor's office or tax collector. You will receive a bill from the local government, usually twice a year, and you must pay it by the deadline shown on the bill. Missing a property tax payment can result in penalties, interest, and eventually a tax lien or foreclosure, even if your mortgage is current.
Some states allow borrowers to opt out of escrow if they meet certain conditions: a minimum down payment (often 20 percent or more), a strong credit score, and a history of on-time payments. Even if you are allowed to opt out, many lenders discourage it because it shifts the risk to them. If you do opt out, set up a reminder system or automatic payment to ensure you do not miss a deadline.
The difference between property taxes and homeowners insurance in your payment
Property taxes and homeowners insurance are often confused because both are frequently collected through escrow and added to your monthly mortgage payment. They are separate obligations. Property taxes fund local services like schools and roads. Homeowners insurance protects your home and belongings from damage and is required by your lender to protect their collateral.
Your mortgage statement will show three escrow items: property taxes, homeowners insurance, and sometimes mortgage insurance (PMI) if your down payment was less than 20 percent. Each has its own line item and its own escrow account. The lender pays the insurance company and the tax authority on your behalf, but you are the one funding all three through your monthly payment.
What happens if your property taxes increase
Property tax assessments are not permanent. When your home is reassessed—which happens on a schedule set by your local government, often every three to five years—the assessed value may go up or down. If it goes up, your property taxes increase, and so does your escrow deposit. Your lender will notify you of the change, usually in the escrow analysis statement.
A significant tax increase can raise your monthly payment by $100 or more, depending on your location and the size of the increase. Some states cap how much property taxes can increase in a single year, but others do not. If you receive notice of a large increase, you can contact your local assessor's office to request a reassessment or file a formal appeal, though the process and timeline vary by jurisdiction.
You cannot avoid the tax increase by switching lenders or refinancing, because the new lender will also require escrow based on the current assessed value. The only way to reduce your property tax bill is to challenge the assessment itself or to move to a jurisdiction with lower tax rates.
Refinancing and how escrow transfers to a new loan
If you refinance your mortgage, the new lender will set up a new escrow account based on the current property tax assessment and insurance costs. The old lender will close out your existing escrow account and send you any remaining balance, usually within 30 to 45 days after the new loan closes. If there is a shortfall—meaning you underpaid into escrow—you may owe the difference.
During the refinance closing, the new lender will collect an initial escrow deposit to cover the first few months of taxes and insurance. This is separate from your down payment or cash to close. Budget for this amount when planning a refinance, because it reduces the cash you walk away with or increases the amount you need to bring to closing.
Frequently Asked Questions
Can I pay my property taxes separately instead of through escrow?
Only if your lender allows it, which requires meeting their criteria for down payment, credit, and payment history. Even if allowed, most lenders discourage it. If you do pay separately, you must pay the tax bill directly to your local government by the deadline, or you risk penalties and foreclosure.
What if my escrow account runs short and the lender cannot pay my tax bill?
This is rare but can happen if property taxes spike unexpectedly. Your lender is required to cover the shortfall and then recalculate your monthly escrow deposit to prevent it from happening again. You will repay the shortage through higher monthly payments over time. The lender cannot let your taxes go unpaid because that would jeopardize their loan.
Do I get a tax deduction for property taxes paid through escrow?
Yes, you can deduct property taxes on your federal income tax return, regardless of whether you pay them directly or through escrow. Keep your escrow analysis statement or mortgage statement as documentation. The deduction is subject to a $10,000 cap per year for state and local taxes combined (SALT limit), which includes property taxes, income taxes, and sales taxes.
How do I know if my escrow calculation is correct?
Review your escrow analysis statement each year. It shows the estimated taxes and insurance, what was actually paid, and your new monthly deposit. If the numbers seem wrong, contact your lender and ask for an explanation. You can also contact your local tax assessor to confirm your property tax bill matches what the lender paid.
What happens to my escrow account if I pay off my mortgage early?
When you pay off the loan, the lender closes the escrow account and refunds any remaining balance to you. However, you become responsible for paying property taxes and insurance directly going forward. Set up reminders or automatic payments so you do not miss a deadline after the mortgage is gone.