Property tax is separate from your mortgage payment, but your lender usually collects it for you
Your mortgage payment and your property tax bill are two different debts. The mortgage goes to the bank that lent you money to buy the house. The property tax goes to your local government — the county assessor or tax collector. However, most lenders require you to pay property tax through an escrow account, which means the lender collects the money from you each month, holds it, and pays the tax bill when it comes due.
This arrangement protects the lender. If you stopped paying property tax, the government could foreclose on the house and take it back, leaving the bank with an unsecured loan. By collecting the tax money from you upfront, the lender makes sure the bill gets paid and the house stays in their name as collateral.
Not all mortgages require an escrow account. If you put down 20 percent or more and have strong credit, your lender may let you pay property tax directly to the government yourself. But most borrowers — especially those with smaller down payments — have no choice: the escrow account is mandatory.
Key Takeaways
- Property tax is a separate bill from your mortgage, owed to your local government, not your lender.
- Most lenders require you to pay property tax through an escrow account built into your monthly mortgage payment.
- Your escrow payment covers property tax, homeowners insurance, and sometimes mortgage insurance — not just one of these.
- You can request to pay property tax yourself if you have a larger down payment and your lender permits it, but this is uncommon.
- Your escrow account is reviewed annually, and your monthly payment may increase or decrease based on changes in tax or insurance costs.
What goes into your escrow account each month
When you have an escrow account, your monthly mortgage payment is divided into four parts: principal (what you borrowed), interest (the cost of borrowing), property tax, and homeowners insurance. Some borrowers also pay mortgage insurance (PMI) through escrow if their down payment was less than 20 percent.
The lender estimates how much property tax and insurance you will owe over the next year, divides that by 12, and adds that amount to your monthly payment. For example, if your property tax is $2,400 per year, the lender adds $200 to your monthly payment. When the tax bill arrives, the lender pays it from the escrow account.
This means your monthly payment can be higher than just the principal and interest. A $300,000 mortgage might have a principal-and-interest payment of $1,400, but with escrow for tax and insurance, your actual payment could be $1,800 or more. The escrow portion does not build equity in your home — it is money held in trust to pay bills on your behalf.
How escrow accounts are adjusted each year
Once a year, usually in the spring, your lender reviews what you actually paid in property tax and insurance over the past 12 months and compares it to what they collected from you. If they collected more than they paid out, you may receive a refund or a credit toward next year's payments. If they collected less, your monthly payment will increase.
Property tax changes when your local assessor reassesses your home's value, which happens on a schedule set by your county — sometimes every year, sometimes every three to five years. When your home value goes up, your tax bill goes up, and so does your escrow payment. Insurance premiums also change year to year based on claims, inflation, and your insurer's rates.
You will receive a document called an escrow analysis or escrow statement that shows exactly what the lender collected, what they paid out, and what your new monthly payment will be. Read this carefully. If the numbers seem wrong — for example, if your property tax went down but your payment went up — contact your lender and ask them to explain the change.
When you can pay property tax yourself instead of through escrow
Some lenders allow borrowers to pay property tax directly to the county instead of through an escrow account. This is most common when you have a down payment of 20 percent or more, a strong credit score, and a loan-to-value ratio (LTV) below 80 percent. Even then, it is not may provide — the lender's policy determines whether they will allow it.
If your lender does allow you to pay property tax yourself, you become responsible for paying the bill on time. If you miss a payment, the county can place a lien on your house or start foreclosure proceedings. Your lender can also demand that you set up an escrow account again if you fall behind.
To request removal of the escrow account, contact your lender's loan servicing department. They will tell you whether your loan allows it and what documentation they need. Even if you are allowed to opt out, many borrowers choose to keep the escrow account because it simplifies budgeting and removes the risk of forgetting to pay the tax bill.
What happens if your property tax increases significantly
If your property tax jumps — because your home was reassessed at a much higher value, or because your local government raised the tax rate — your escrow payment will increase at the next annual review. This can be a shock if you were not expecting it.
Some states have laws that limit how much property tax can increase in a single year. California's Proposition 13, for example, caps increases at 2 percent per year unless the property changes ownership. Other states have no cap. Check your county assessor's website or call them directly to understand how often your property is reassessed and what the next assessment might bring.
If your escrow payment increases more than you can afford, you have a few options: you can request a payment plan from your lender, you can refinance your mortgage to spread the new payment over a longer term, or you can appeal your property tax assessment to the county if you believe it is too high. An appeal does not may provide a reduction, but it is free to file and worth doing if your home was clearly overvalued.
The difference between escrow and impound accounts
In some states, lenders use the term impound account instead of escrow account. They mean the same thing: a separate account where the lender holds your money to pay property tax and insurance on your behalf. The terminology varies by region, but the mechanics are identical.
Both escrow and impound accounts are regulated by federal law. The lender must keep the money in a separate account, cannot use it for their own purposes, and must provide you with an annual statement showing what they collected and what they paid out. If the lender fails to pay a bill from your escrow account — for example, if they forget to pay your property tax — you are not responsible for the late fees or penalties. The lender is.
Frequently Asked Questions
Can I pay my property tax bill directly even if my lender requires escrow?
No. If your loan requires an escrow account, you must pay the lender, not the county directly. The lender will pay the county from your escrow account. Paying the county separately while also paying escrow to the lender would result in overpayment. If you want to pay the county directly, you must first get written permission from your lender to remove the escrow requirement.
What if my lender forgets to pay my property tax bill from escrow?
Contact your lender immediately and ask for proof that the bill was paid. If the lender failed to pay, they are responsible for any late fees or penalties, not you. Document everything in writing and follow up with a letter. If the lender does not correct the error, you can file a complaint with your state's banking regulator or the Consumer Financial Protection Bureau.
Does my escrow payment go toward building equity in my home?
No. The escrow portion of your payment is held in trust and used to pay bills on your behalf. Only the principal portion of your mortgage payment builds equity. The interest, property tax, insurance, and mortgage insurance portions do not build equity — they are expenses.
Why did my escrow payment increase if my property tax didn't change?
Your homeowners insurance premium may have increased, or your lender may have miscalculated the previous year's escrow amount. Review your escrow statement carefully. If you believe the increase is wrong, contact your lender and ask them to recalculate. You have the right to dispute the amount and request an explanation in writing.
Can I refinance to lower my escrow payment?
Refinancing does not lower your property tax or insurance costs — those are set by your county and your insurer, not your lender. However, refinancing to a longer loan term can lower your monthly payment overall, which may make the escrow increase easier to absorb. Talk to a lender about whether refinancing makes sense for your situation.