Property taxes are not automatically included in your mortgage payment, but your lender may require you to pay them through escrow

Your mortgage payment covers principal, interest, and possibly insurance and taxes — but only if your lender sets up an escrow account. Property taxes (also called real estate taxes) are separate from the mortgage itself. Your lender can require you to fund an escrow account so they know the taxes will be paid, because unpaid property taxes create a lien on the house that puts their loan at risk. Whether taxes are rolled into your monthly payment depends on your loan agreement and down payment size.

If you put down less than 20 percent, most lenders require an escrow account. If you put down 20 percent or more, escrow is often optional — you can pay property taxes directly to your county or municipality instead. Either way, you owe the taxes; the only question is whether the lender collects them from you monthly or you handle them yourself.

Key Takeaways

  • Property taxes are a separate obligation from your mortgage and are owed to your local government, not your lender.
  • Lenders typically require an escrow account if your down payment is less than 20 percent, which means taxes are collected monthly and paid on your behalf.
  • Your escrow payment covers property taxes, homeowners insurance, and sometimes mortgage insurance, but the amounts change annually as tax assessments and insurance premiums shift.
  • If you have 20 percent equity or more, you may be able to request removal of the escrow requirement, though your lender can refuse.
  • Property taxes vary widely by location and are set by your county assessor, not your lender or mortgage company.

How escrow accounts work with property taxes

When your lender requires escrow, you pay a monthly amount that covers one-twelfth of your estimated annual property taxes, homeowners insurance, and possibly mortgage insurance. The lender holds this money in a separate account and pays the tax bill and insurance premiums when they come due. You do not write checks to the county or the insurance company — the lender does it for you.

Your lender estimates the escrow amount based on the previous year's tax bill and insurance costs. Once a year, usually in the spring, the lender reviews the actual amounts paid and adjusts your monthly escrow payment up or down. If taxes rose or your insurance premium increased, your payment goes up. If the county reassessed your home at a lower value, your payment may go down. These adjustments can surprise homeowners, but they are routine.

You can request an escrow analysis at any time if you believe the estimate is wrong. Bring recent tax bills and insurance statements to your lender and ask them to recalculate. Some lenders will adjust mid-year; others will wait until the annual review.

When property taxes are not included in your mortgage payment

If you have at least 20 percent equity in your home and your lender allows you to opt out of escrow, you pay property taxes directly to your county assessor or tax collector. You receive a bill once or twice a year (depending on your location) and pay it yourself by the important date. Missing the important date results in penalties and interest, and unpaid taxes can eventually lead to a tax sale of your home.

Some homeowners prefer this arrangement because they have full control over the payment and can time it to their cash flow. Others find it easier to have the lender handle it. There is no tax advantage to either method — you owe the same amount either way. The choice is purely about convenience and cash flow management.

If you refinance your mortgage, your new lender may require escrow even if your old one did not. Refinance agreements often include escrow as a condition, especially if your equity has declined or rates have changed significantly. Read the new loan estimate carefully to see whether escrow is required or optional.

How property tax amounts are determined

Your property tax bill is calculated by your county assessor, not your lender. The assessor estimates the market value of your home, applies the local tax rate (which varies by county and often by school district), and sends you a bill. Tax rates range from less than 0.5 percent of home value in some states to over 2 percent in others. A $300,000 home in a low-tax state might owe $1,500 per year; the same home in a high-tax state might owe $6,000 or more.

You can challenge your assessment if you believe the value is wrong. Most counties allow you to file a formal appeal within a set window (often 30 to 60 days after you receive the assessment notice). You will need to show comparable sales or evidence that the assessor overvalued your property. If you win the appeal, your tax bill drops and your escrow payment is adjusted downward.

Property taxes are not deductible on your federal tax return if you are subject to the SALT cap (state and local tax limitation). The cap limits your deduction to $10,000 per year, regardless of how much you pay in property taxes, income taxes, and sales taxes combined. This affects high-income earners and people in high-tax states most severely. Consult a tax professional about whether the SALT cap applies to your situation.

The difference between escrow and impound accounts

Escrow and impound are the same thing — different lenders use different names. Both refer to an account where the lender collects money from you monthly and pays taxes and insurance on your behalf. Some lenders call it an escrow account; others call it an impound account or a reserve account. The mechanics are identical regardless of the name.

The account is held in your name, but the lender controls it. You cannot withdraw money from it or use it for other purposes. If you pay off your mortgage early, any remaining balance in the account is returned to you, usually within 30 to 45 days.

Removing escrow from your mortgage payment

To remove the escrow requirement, you typically need at least 20 percent equity in your home and a good payment history (usually 12 months of on-time payments). You submit a written request to your lender's escrow department. The lender reviews your request and either approves or denies it. There is no legal right to remove escrow; the lender can refuse even if you meet the equity threshold.

If your request is approved, you will receive a final escrow statement showing the balance in the account. Any surplus is refunded to you; any shortage is due when ready. After that, you are responsible for paying property taxes and insurance directly. Your monthly mortgage payment drops because it no longer includes the escrow portion.

Keep in mind that if your home value drops and your equity falls below 20 percent, your lender can require escrow again. This happened to many homeowners during the 2008 housing crisis. If you refinance, your new lender may also require escrow regardless of your current equity.

Property taxes versus mortgage interest on your tax return

Property taxes and mortgage interest are two separate deductions on your federal tax return (if you itemize). Mortgage interest is the cost of borrowing money; property taxes are a separate obligation to your local government. Both are deductible, but the SALT cap limits your combined deduction for state and local taxes (including property taxes, income taxes, and sales taxes) to $10,000 per year.

Your mortgage lender sends you a Form 1098 each January showing the interest you paid in the previous year. Your county assessor or tax collector does not send a form — you track your property tax payments yourself. If you pay through escrow, your lender's escrow statement shows how much was paid in taxes, but that is not an official tax document. Keep your county tax bills and payment receipts for your records.

If your property taxes exceed $10,000 per year and you are subject to the SALT cap, you cannot deduct the excess. This is a permanent limitation under current tax law, though it is scheduled to expire after 2025 unless Congress extends it. A tax professional can help you understand whether you benefit from itemizing or taking the standard deduction.

Frequently Asked Questions

Can my property tax payment change after I lock in my mortgage rate?

Yes. Your mortgage rate is fixed, but property taxes are reassessed by your county and can increase or decrease. If taxes rise, your escrow payment rises even though your mortgage payment stays the same. This is why your total housing payment can go up even when your interest rate does not.

What happens if my lender pays my property taxes late?

It is rare, but if your lender misses a payment important date, you are still responsible for any penalties and interest. Contact your lender when ready and ask them to pay the penalty. Most lenders will cover it because it is their error. Get written confirmation that the late payment was their mistake, in case the county pursues collection.

Do I have to use escrow if my lender offers it as optional?

No. If your lender says escrow is optional, you can choose to pay property taxes and insurance directly. However, if you miss a payment, your lender can require escrow again and may charge a fee to set it up. Weigh the convenience of automatic payment against the flexibility of handling it yourself.

How do I know if my property tax assessment is correct?

Compare your assessed value to recent sales of similar homes in your area. Your county assessor's website usually shows assessed values for all properties. If your home is assessed significantly higher than comparable sales, file an appeal. The important date is typically 30 to 60 days after you receive the assessment notice.

Does paying property taxes through escrow affect my credit score?

No. Escrow is straightforward a payment method — it does not appear on your credit report. Your credit score is based on your mortgage payment history, not on how you pay property taxes. Paying taxes through escrow or directly has no impact on your credit.