Property tax is not automatically included in your mortgage payment, but your lender can require you to pay it through escrow
Your mortgage payment covers the loan principal and interest. Property tax is a separate bill from your local government. However, many lenders require borrowers to set aside money each month in an escrow account — a holding account managed by the lender — so the lender can pay your property tax bill when it comes due. Whether this happens depends on your loan type, down payment size, and what your lender requires.
If you have an escrow account, your monthly payment will include an estimate for property tax, even though it is not technically part of the mortgage itself. If you do not have an escrow account, you pay property tax directly to your local government on a separate schedule, usually once or twice a year.
Key Takeaways
- Lenders often require escrow accounts for borrowers with less than 20 percent down, which means property tax is collected monthly and paid by the lender.
- Your monthly mortgage statement will show property tax as a line item if you have escrow, but it goes into a separate account, not toward your loan balance.
- Property tax bills vary by location and property value, so your escrow estimate may be adjusted each year when the lender receives the actual tax bill.
- If you pay off your mortgage, you are still responsible for property tax — it does not end when the loan does.
When lenders require an escrow account for property tax
Most lenders require an escrow account if your down payment is less than 20 percent of the home's purchase price. This is because the lender wants to protect its investment — if property tax goes unpaid, the local government can place a lien on the home or foreclose, which puts the lender's money at risk.
Lenders may also require escrow if you are taking out an FHA loan, VA loan, or USDA loan, regardless of your down payment amount. Some lenders require it for all borrowers as a standard practice. When you receive your loan estimate from the lender, it will state whether escrow is required or optional.
If escrow is optional and you choose not to use it, you must pay property tax directly to your county or municipality on their schedule. You remain fully responsible for paying on time — the lender has no role in this arrangement.
How the escrow account works month to month
When you have an escrow account, your lender estimates your annual property tax bill and divides it by 12. That amount is added to your monthly mortgage payment. The money sits in the escrow account until the tax bill is due, at which point the lender pays it on your behalf.
Your monthly mortgage statement will show this as a separate line item, often labeled "property tax and insurance" or "taxes and insurance." This money does not reduce your loan balance — it is held in reserve. The lender also typically holds homeowners insurance in the same escrow account.
Once a year, usually after your property tax bill is finalized, the lender reviews the escrow account. If the estimate was too high, you may receive a refund or a credit toward next year's payments. If the estimate was too low, your monthly payment may increase to make up the difference.
Property tax amounts vary by location and reassessment
Property tax rates and amounts differ significantly by county, city, and state. Some areas tax at 0.3 percent of home value annually; others tax at 2 percent or higher. Your local assessor determines your home's assessed value, which is used to calculate the tax bill.
When you first get a mortgage, the lender bases the escrow estimate on the previous owner's tax bill or a current assessment. However, your assessed value may change after you purchase the home, especially if the assessor updates records to reflect the sale price. This can cause your property tax bill — and your escrow payment — to increase.
If your property tax bill changes significantly, your lender will adjust your monthly escrow payment. You will receive a notice showing the new amount. Some states cap how much property tax can increase in a single year, but this varies by location.
What happens if you pay off your mortgage
Property tax does not disappear when your mortgage is paid off. You remain responsible for paying it for as long as you own the home. Once the loan is gone, you will pay property tax directly to your local government instead of through an escrow account.
The lender will close the escrow account and send you any remaining balance. If there is a shortfall — meaning the account did not have enough to cover the final tax bill — you will receive a bill for the difference.
Comparing escrow and non-escrow payment arrangements
| Aspect | With Escrow Account | Without Escrow Account |
|---|---|---|
| Who pays property tax | Lender pays on your behalf from escrow | You pay directly to local government |
| When you pay | Monthly, as part of mortgage payment | On the schedule set by your county or city |
| Payment frequency | 12 equal monthly amounts | Usually once or twice per year |
| Who typically requires it | Lenders with less than 20% down, FHA/VA/USDA loans | Borrowers with 20%+ down, if lender allows |
| Risk of missed payment | Low — lender manages payment | High — you are responsible for remembering |
Frequently Asked Questions
Can I remove escrow from my mortgage after I have paid down the loan?
Some lenders allow you to remove escrow once your loan balance drops to 80 percent of the home's original value and you have a good payment history. You must request this in writing. However, the lender is not required to agree, and some lenders do not offer this option at all. Check your loan documents or contact your lender to learn their policy.
What if my escrow account runs short and cannot cover the tax bill?
If the escrow account does not have enough money when the tax bill is due, the lender will pay it from its own funds and then increase your monthly escrow payment to rebuild the account. You will receive a notice showing the new payment amount. This is why escrow estimates are adjusted annually.
Does property tax go down if my home value decreases?
Property tax is based on assessed value, not market value. If your home's market value drops but the assessor does not lower the assessed value, your tax bill stays the same. You can challenge an assessment through your local assessor's office if you believe it is too high, but this process varies by location.
Is property tax deductible on my income taxes?
Property tax paid to state and local governments may be deductible on your federal income tax return, subject to limits. This is separate from your mortgage and escrow arrangement. Consult a tax professional about whether your situation qualifies for this deduction.