Escrow is money your lender holds to pay property tax and insurance on your behalf

If you have a mortgage, your lender likely requires you to pay property tax through escrow. This means you don't pay the tax bill directly to your county or municipality. Instead, you send money to your lender each month as part of your mortgage payment, and the lender holds that money in a separate account until the tax bill is due. Then the lender pays the bill from that account.

Escrow is not optional if you borrowed money to buy the home. Lenders require it because they have a financial stake in the property — if you don't pay property tax, the county can foreclose and take the house. The lender protects itself by controlling the tax payment.

The escrow amount is an estimate. Your lender calculates how much you owe in property tax for the year, divides it by 12, and adds that to your monthly mortgage payment. If the actual bill is higher or lower than the estimate, your lender adjusts your payment up or down the following year.

Key Takeaways

  • Escrow is a separate account your lender controls to pay property tax and homeowners insurance on your behalf each month.
  • Your lender estimates your annual property tax, divides it by 12, and adds that amount to your monthly mortgage payment.
  • You do not receive a separate property tax bill if your lender pays through escrow — the lender handles the payment to the county.
  • If your escrow estimate was too high or too low, your lender adjusts your monthly payment the following year and may refund or bill you the difference.
  • You can request an escrow analysis from your lender at any time if you believe the estimate is wrong.

How the escrow payment amount is calculated

Your lender starts with your property's assessed value and the tax rate in your county or municipality. They look at your most recent property tax bill or, if you're buying, the seller's most recent bill. They multiply the rate by the value to estimate your annual tax, then divide by 12 to get your monthly escrow payment.

This is an estimate because property values change, tax rates can shift, and some counties reassess every few years. Your lender builds in a small cushion — usually 10 to 20 percent extra — to avoid running short when the bill arrives. If the cushion is too large, you may receive a refund at the end of the year.

Your lender is required by federal law to conduct an escrow analysis at least once a year. This review compares what they estimated against what they actually paid. If the difference is large enough, they adjust your payment. You can request an analysis anytime if you think the estimate is wrong — for example, if your property was reassessed or your tax rate changed.

What happens if your escrow account runs short

If the actual property tax bill is higher than your lender estimated, the escrow account may not have enough money to cover it. When this happens, your lender pays the bill anyway — they cannot let the tax go unpaid — and then bills you for the shortfall.

The lender may ask you to pay the shortage in one lump sum, or they may spread it across your next 12 monthly payments by raising your escrow amount. Federal law requires them to notify you in writing of any shortage and explain how they plan to fix it. You have the right to dispute the analysis if you believe it's wrong.

Shortages are common after a property reassessment or when your county raises tax rates. If you know a reassessment is coming, you can contact your lender ahead of time to discuss what to expect.

What happens if your escrow account has a surplus

If your lender collected more than they needed to pay your property tax bill, you have a surplus. Federal law requires your lender to refund any surplus over $50 within 30 days of the escrow analysis. Smaller surpluses can be credited toward your next year's escrow payments.

You should receive a written escrow statement showing the surplus and explaining how it will be handled. If you don't receive one, contact your lender and ask for an escrow analysis statement. Keep these statements on file — they show the history of what you've paid and what the lender actually paid to the county.

Escrow for homeowners insurance

Most lenders also require you to pay homeowners insurance through escrow, using the same process as property tax. Your lender estimates your annual insurance premium, divides it by 12, and adds it to your monthly payment. When the insurance bill is due, the lender pays the insurer directly from the escrow account.

If your insurance premium increases, your lender will raise your escrow payment. If you shop for a cheaper policy and switch insurers, notify your lender immediately so they can adjust the escrow amount. Some borrowers reduce their monthly payment significantly by finding a lower-cost policy.

Can you opt out of escrow

Whether you can stop using escrow depends on your loan type and how much equity you have in the home. Conventional loans often allow borrowers to drop escrow once they reach 20 percent equity and have a good payment history. FHA loans typically require escrow for the life of the loan. VA and USDA loans have their own rules.

If you drop escrow, you become responsible for paying property tax and insurance directly to the county and your insurer. You must pay on time — if you miss a property tax payment, the county can place a lien on your home or foreclose. Many borrowers keep escrow because it simplifies budgeting and removes the risk of forgetting a payment.

Contact your lender to ask whether you're allowed to drop escrow and what conditions you must meet. They will explain the process and any fees involved. Some lenders charge a fee to close an escrow account.

How to read your escrow statement

Your lender sends an escrow statement at least once a year, usually after they've paid your property tax bill. The statement shows three main numbers: the opening balance (money in the account at the start of the year), the disbursements (what they paid out for tax and insurance), and the closing balance (money left in the account).

The statement also shows your estimated monthly escrow payment for the coming year. If this number changed from last year, the statement explains why — usually because your tax bill or insurance premium went up. Review the statement carefully and compare the disbursements to your actual tax bill and insurance invoice. If the numbers don't match, contact your lender and ask for an explanation.

Frequently Asked Questions

Do I have to pay property tax if my lender pays through escrow?

Yes, you pay it — but indirectly. You send money to your lender each month as part of your mortgage payment, and the lender pays the tax bill to the county on your behalf. You are still responsible for the tax; the lender is just handling the payment.

What if I disagree with my escrow analysis?

Contact your lender in writing and explain why you think the estimate is wrong. Provide documentation — a new property assessment, a recent tax bill, or proof of a rate change. Your lender must respond within a set timeframe and either adjust the analysis or explain why they believe it's correct.

Can my escrow payment change in the middle of the year?

Usually no. Lenders typically adjust escrow payments once a year after the annual analysis. However, if your property is reassessed mid-year or your insurance premium changes, your lender may adjust your payment sooner. They must notify you in writing before making the change.

What happens to my escrow account if I sell my house?

When you sell, the escrow account is closed. Any surplus is refunded to you, usually within 30 days. If there's a shortage, you may be billed for it at closing. The new owner and their lender will set up a new escrow account based on the property's new assessed value and the new owner's insurance.

Is escrow the same as a security deposit?

No. Escrow for property tax is a payment account your lender controls. A security deposit is money you give a landlord to cover damage. They are separate concepts used in different situations.