Yes – for many homeowners, paying property taxes through your mortgage (via an escrow account) is a convenient and safe choice, but it isn’t universally better for everyone.
Surprising Stat: Nearly 80% of U.S. homeowners with mortgages use escrow accounts for property taxes, yet about 70% of homes sold at tax lien auctions had no mortgage – meaning no escrow safety net to ensure taxes were paid.
Paying Property Tax With Your Mortgage: Convenience or Costly?
- 🏦 Escrow Simplified: Why mortgage servicers use escrow accounts to pay your property taxes and how this protects your home from tax liens.
- ⚖️ Escrow vs. Direct Payment: A side-by-side comparison of letting the lender handle taxes vs. paying them yourself, highlighting financial impacts and control.
- 💡 Money Matters: How escrow affects your cash flow, interest earnings, and tax deductions (SALT limits), plus whether you could save money by managing taxes on your own.
- 📜 Rules & Rights: Key federal rules (IRS, Fannie Mae/Freddie Mac guidelines, FHA/VA requirements) and state laws (like escrow interest mandates) that influence whether you must or should escrow.
- ❗ Avoid Costly Mistakes: Common pitfalls homeowners face with property tax payments – from escrow surprises to missed payments – and how to avoid them.
What It Means to Pay Property Tax “With” Your Mortgage
When you pay property tax “with” your mortgage, it means you use an escrow account managed by your mortgage servicer. An escrow (or impound) account is a separate fund where your lender collects a portion of your property tax (and often homeowner’s insurance) each month as part of your mortgage payment. The servicer then pays your local property tax bill on your behalf when it comes due.
Essentially, your annual taxes are divided into twelve installments, included in your monthly mortgage bill, instead of you paying a large lump sum to the county once or twice a year.
Using escrow is very common – most lenders automatically set up an escrow account when you get a mortgage, especially if you make a smaller down payment.
The mortgage servicer (the company that collects your payments) will work directly with your local tax assessor or county treasurer. They receive your tax bills and handle the payment using the funds you’ve contributed.
This setup means you don’t have to remember property tax deadlines or worry about writing a big check during tax season. It’s all handled as part of your mortgage.
However, paying property tax with your mortgage isn’t the only way. Some homeowners choose to pay taxes directly themselves, without escrow.
In that case, the homeowner is responsible for saving up and paying their property tax bill by the due date (which can vary by state or county). If you opt out of escrow, your monthly mortgage payment will be lower (since it’s just principal and interest, and perhaps insurance), but you need to budget separately for the tax bill.
Whether escrow is better for you depends on your financial discipline, cash flow, and even your lender’s rules.
Why Lenders Use Escrow Accounts (and When They Require Them)
Lenders have a big interest in making sure your property taxes get paid on time. Property tax liens are typically superior to mortgage liens – meaning if you don’t pay your property taxes, the local government can place a lien and eventually foreclose on your home even if you’re current on the mortgage. In a tax foreclosure, the government (or a lien buyer) can seize the property, and the mortgage lender could end up with nothing. That’s a nightmare scenario for lenders.
To prevent this, lenders often require escrow accounts so they can ensure taxes (and homeowners insurance) are paid without fail.
If you made a down payment of less than about 20%, most banks will insist on an escrow. For example, conventional loans underwritten to Fannie Mae or Freddie Mac guidelines generally mandate escrow if your loan-to-value (LTV) is above 80%. Only when you have more than 20% equity (LTV 80% or below) might the lender allow you to waive the escrow.
Government-backed loans are even stricter. FHA loans always require an escrow account for property taxes and insurance, no matter how much equity you have.
VA loans technically do not require escrow by law (the VA doesn’t mandate it), but in practice many VA lenders will still set up an escrow to protect against tax default. The same goes for USDA rural home loans – escrow is usually part of the deal.
Escrow accounts give lenders peace of mind. By collecting a bit of tax money each month, the lender knows the big tax bill will be covered.
It also protects you as the borrower from accidental default. Many homeowners prefer this arrangement because it simplifies budgeting.
You merge your property taxes and insurance into your monthly mortgage payment (often called PITI – Principal, Interest, Taxes, Insurance).
Rather than scrambling to gather a large sum once a year, you pay a manageable amount each month and avoid a year-end financial strain.
How Mortgage Escrow Accounts Work
When your mortgage includes escrow, your monthly bill includes an extra portion earmarked for taxes and insurance. The mortgage servicer deposits these funds into your escrow account. Think of it like a dedicated piggy bank for your property obligations.
Each time you pay, the escrow balance grows, and when your property tax bill comes due (for example, semi-annually or annually, depending on your jurisdiction), the servicer uses the escrow funds to pay the local tax collector on your behalf.
Federal law (the Real Estate Settlement Procedures Act, or RESPA) sets some rules for escrow accounts. For instance, a servicer can keep a cushion of up to two months’ worth of payments to cover unexpected increases.
Each year, the servicer will send you an escrow analysis statement. This shows last year’s estimates versus actual taxes paid and projects the coming year. If your property tax amount changed, your monthly escrow portion will be adjusted up or down.
For example, if your taxes went up, the servicer may have paid more than expected – resulting in an escrow shortage. You typically get options: pay the shortage in a lump sum or have your monthly payment increase to cover it over the next year.
Conversely, if they collected too much (an escrow surplus), you’d get a refund or a credit toward future payments.
Importantly, the money in escrow is your money. If you pay off your mortgage or refinance, any leftover escrow funds are returned to you.
Similarly, if you sell the house, you’ll get the remaining escrow balance back after closing.
Servicers cannot keep excess escrow funds indefinitely – RESPA requires them to refund surpluses above a small threshold (around $50) annually if your loan is current.
Paying Property Taxes on Your Own (No Escrow)
Not all homeowners escrow their taxes. If you have sufficient equity or a lender that permits it, you might choose to handle property tax payments yourself. In this scenario, your monthly mortgage payment covers only principal and interest (and maybe mortgage insurance if applicable). It’s up to you to budget for the property tax so that when the bill arrives, you can pay it out-of-pocket.
Paying taxes independently offers a greater sense of control. You hold onto your money until the tax is actually due.
This can be advantageous – for example, you could keep those funds in a high-yield savings account during the year and earn interest, instead of letting the servicer hold them.
Over several months, that interest could put a little extra cash in your pocket, especially when rates are high.
However, the trade-off is personal responsibility.
Without escrow, you absolutely must remember to pay your taxes by each deadline.
Typically, property taxes are due in one or two large installments per year (many areas bill biannually).
Missing a payment can lead to penalties and interest charges. Prolonged failure to pay can even trigger a tax lien on your home.
Homeowners who opt out of escrow need to be disciplined – it often makes sense to set up your own “escrow” by automatically transferring money each month into a savings account earmarked for property tax.
That way, you’re not caught short when the $5,000+ bill arrives.
It’s worth noting that even if you don’t escrow, your mortgage lender will likely monitor the situation.
Many lenders do periodic checks (or they’re informed via county records) to confirm property taxes are paid. If you fall behind, the lender can step in. In most mortgage agreements, failing to pay property tax is a breach of contract.
The lender might pay the tax on your behalf (to protect their interest) and then set up an escrow account forcibly, adding that cost to your loan payments. In a worst-case scenario, repeated neglect could even lead the lender to declare a default on the mortgage.
In short, paying on your own gives flexibility but demands responsibility.
Federal Tax Deductions and SALT Limits
From a pure tax perspective (IRS rules), it generally makes no difference whether you pay your property taxes via escrow or directly. What matters is when and how much property tax is paid to the taxing authority.
Property taxes on your primary residence (and second homes) are deductible on your federal income tax if you itemize, but since 2018 they’ve been subject to the SALT cap – a combined $10,000 limit on state and local tax deductions. That cap applies regardless of how you pay the tax, so escrow versus self-payment doesn’t change your ability to deduct (you’re capped at $10k either way, if you itemize).
You can only deduct property tax in the year it’s actually paid to the government. If you pay into escrow in one year but the servicer doesn’t send the tax payment until the next year, the deduction applies to that next year. This timing usually isn’t a big issue, but it’s good to understand – especially if you were thinking of paying property taxes early to maximize a deduction in a given year. (With the $10k SALT limit, early-payment strategies have become less useful for most people.)
For real estate investors or landlords, property tax is typically a business expense (fully deductible against rental income, with no $10k cap). Escrow vs. direct payment doesn’t matter for that deduction either – it’s about the fact the tax was paid. Many investors prefer not to escrow so they can control their cash flow and earn interest on the funds. However, an investor with numerous properties might appreciate escrow to offload the hassle of tracking many tax bills, so it really depends on personal preference.
State-by-State Differences in Property Tax Payments
Property tax systems and laws differ widely across states (and even counties).
Payment Schedules: Some states bill property taxes annually (e.g., Texas property taxes are due once a year, typically by January 31 for the previous year). Others bill semi-annually – for instance, California splits property taxes into two installments (fall and spring). A few localities use quarterly billing.
When you have an escrow, these schedules are handled behind the scenes by your servicer. If you’re paying yourself, you need to know the calendar and be prepared. A state with one big annual payment might require more foresight (you’ll need a large sum at once) compared to a state with two or four smaller installments.
Penalties and Interest: All states impose penalties for late property tax payments, but the specifics vary. Some areas have short grace periods; others tack on fees or interest immediately after the deadline. If you handle payments yourself, be aware of your local rules – a common mistake is assuming a slight delay is okay, only to be hit with a hefty late fee. With escrow, the servicer is obligated to pay on time (and if they ever pay late, typically they must cover any penalty, not you).
Property Tax Amounts: Property tax rates differ by location. In some states like New Jersey or Illinois, property taxes can exceed 2% of a home’s value annually (around $8,000+ a year on a $400,000 home). In other areas, like parts of the South or Hawaii, rates are under 0.5%.
If you live in a high-tax area, the escrow vs. no-escrow decision looms larger because the sums are significant. A large tax bill can be tough to manage on your own if you haven’t escrowed. On the other hand, in a low-tax area, you might feel comfortable handling it yourself if the annual bill is only a few hundred dollars.
State Escrow Laws (Interest on Escrow Accounts): Some states have laws to protect consumers with escrow accounts. About 15 states require mortgage lenders to pay interest on escrow balances. For example, California law mandates around 2% annual interest on escrow funds; states like New York, Connecticut, Maryland, and others have similar requirements (though the exact rates vary).
If you live in a state that mandates interest on escrow and you keep a hefty balance, you’ll at least earn a small return on that money. In most states, however, escrow accounts do not earn interest for the homeowner. Any interest that accrues is typically kept by the bank (or the accounts are simply non-interest-bearing).
There has been some legal back-and-forth on whether national banks must follow these state escrow interest laws. In fact, the issue reached the U.S. Supreme Court in 2024 (in Cantero v. Bank of America) because federal banking rules sometimes conflict with state consumer laws.
The Supreme Court’s decision clarified the test for when such state laws are preempted by federal law. The takeaway: in many places, you shouldn’t expect interest on escrow funds unless your state explicitly mandates it.
Aside from interest, a few states have other escrow-related regulations (like requiring clear disclosures or providing escrow account statements). It’s always good to check if your state offers any extra protections. For instance, some states require servicers to notify you and provide options if your tax bill changes significantly in one year.
Pros and Cons of Paying Property Tax Through Your Mortgage
Many factors determine whether including property tax in your mortgage payment is “better” for you. Here’s a summary of the pros and cons of using an escrow account:
| Paying via Mortgage Escrow – Pros | Paying via Mortgage Escrow – Cons |
|---|---|
| Convenience & Automation: One combined payment covers your mortgage and taxes, so you never miss a tax deadline. | Loss of Control: You rely on the lender to pay your bills. If the servicer errs or overestimates, your money might sit in escrow longer than necessary. |
| No Large Year-End Bills: Avoid the shock of a big annual or semi-annual tax payment – costs are smoothed out monthly. | No Interest for You: Your tax money sits in escrow (usually without interest to you) instead of earning interest in your own account until tax day. |
| Preventing Penalties: Ensures property taxes are paid on time, preventing late fees or tax liens on your home. | Escrow Cushion Required: The lender often holds a cushion (up to 2 months of taxes) in escrow, meaning extra money tied up that you can’t use (though refunded when you pay off the loan). |
| Simplified Budgeting: Easier to plan finances when taxes and insurance are fixed into your mortgage payment (PITI). | Payment Fluctuations: If taxes or insurance premiums rise, your mortgage payment can jump after escrow recalculation – even if your principal and interest are fixed. |
| Often Required for Low-Down Loans: No need to pay an escrow waiver fee or higher rate (some lenders charge these if you opt out of escrow). | Servicer Mistakes (Rare): Errors are uncommon, but if the servicer pays the wrong amount or late, it can cause hassle – you still need to monitor your statements occasionally. |
As you can see, using escrow shines when it comes to peace of mind and ease. You’re essentially paying a bit of your taxes with each mortgage payment, like a savings plan. On the other hand, the downsides mostly revolve around control of your money and having to trust a third party (the loan servicer). Some people simply prefer to handle their obligations directly, especially if they’re financially savvy and diligent.
Comparing Three Scenarios: Escrow vs. Self-Pay vs. Hybrid
Homeowners generally encounter three scenarios regarding property tax payments. Below is a comparison of how each scenario works and key considerations:
| Property Tax Payment Method | How It Works & Key Considerations |
|---|---|
| 1. Self-Managed (No Escrow) | The homeowner pays property taxes directly to the county. You must budget and save for tax bills on your own. This offers maximum control – you keep your money until taxes are due and can even earn interest on it. However, you carry the risk of forgetting a payment or not having enough set aside. Strong discipline and record-keeping are essential to avoid late fees or liens. |
| 2. Mortgage Escrow (Lender-Paid) | Taxes are collected as part of your monthly mortgage payment and paid by your loan servicer when due. This is a hands-off approach – your servicer deals with the local tax collector and ensures payments are on time. It simplifies budgeting since you have a consistent monthly PITI payment. The downside is you don’t control the funds once they’re in escrow, and if estimates overshoot actual taxes, money might sit in the account until it’s refunded or applied later. Most first-time buyers (and anyone with a small down payment) will be in this category by default. |
| 3. Hybrid Approach (Partial Escrow) | In some cases, a hybrid approach is possible. This could mean only certain items are escrowed. For example, a lender might require escrow for homeowner’s insurance but allow you to pay property taxes yourself (or vice versa). Another hybrid scenario occurs if you cancel an escrow account mid-year – part of the year was handled by escrow and the remainder you pay directly. A partial approach can offer a bit more control or flexibility, but it’s less common and can be confusing to manage. Most lenders prefer a clear all-or-nothing approach. |
Most homeowners will fall into either the self-managed or full escrow categories. The hybrid scenario is relatively rare, but it’s good to know it exists (sometimes via special arrangements or during transitions like refinancing or loan servicing changes).
Avoid These Common Mistakes
Handling property taxes, whether through escrow or not, can trip up homeowners. Here are some common mistakes and how to avoid them:
- Ignoring Your Escrow Statements: Don’t assume everything is perfect. Read your annual escrow analysis. Many owners are surprised when their “fixed” mortgage payment changes due to tax or insurance adjustments. Avoid shock by reviewing and understanding those statements each year.
- Not Budgeting After Canceling Escrow: If you remove your escrow account, remember that you are now in charge of setting aside money for taxes and insurance. Some folks celebrate a lower monthly payment but forget to save the difference for the looming tax bill – a recipe for trouble when tax season arrives.
- Double-Paying the Tax Bill: When you have an escrow, the county may still mail you the property tax bill for your records. A big mistake is paying it yourself, not realizing your lender will also pay it out of escrow. That can tie up your money and require a refund. If you escrow, let the servicer handle the payment.
- Misusing Escrow Surplus Refunds: If you get an escrow surplus check, don’t treat it like free bonus cash without understanding why you got it. That surplus could be due to an overestimation or a temporary drop in taxes. Keep in mind that taxes might rise next year, so consider saving any refund or applying it toward future payments rather than spending it immediately.
- Ignoring Escrow Shortage Notices: Conversely, if you receive notice that your escrow has a shortage, address it promptly. You’ll typically be given options: make a one-time payment to cover the gap or have your monthly payment increase. Don’t ignore the letter – choosing an option and staying current will prevent more painful adjustments later.
- Forgetting Tax Payments (No Escrow): It sounds obvious, but busy homeowners sometimes miss a property tax due date when they pay on their own. Set calendar reminders well ahead of the deadline, and if possible, schedule the payment with your county or use their installment plan. Consistency is key when you’re managing it yourself.
- Assuming Escrow Is Foolproof: Escrow greatly reduces the risk of a missed payment, but don’t completely tune out. Occasionally, servicers can make mistakes or delays (especially if your loan is sold to a new company). Keep an eye on your homeowner’s insurance renewal and the annual tax bill. Ensure you receive confirmation that bills were paid. If something seems off (for example, you get a delinquency notice), contact your servicer immediately.
- Not Appealing an Incorrect Assessment: This is a general property tax tip that applies whether or not you escrow. If your property’s assessed value (for tax purposes) shoots up unfairly, you could be overpaying on taxes. Many people let escrow just pay whatever the bill is, but a proactive homeowner will consider appealing an excessive assessment. If you successfully get your assessment (and tax) lowered, your escrow will adjust and you’ll save money.
Real-Life Examples
Sometimes it helps to see how these choices play out. Consider two homeowners with similar houses and tax bills, but different approaches:
Example 1 – Alice (Escrow Comfort): Alice is a first-time homeowner with a conventional mortgage and 10% down. Her lender required an escrow, so every month Alice’s mortgage payment includes about $300 earmarked for property taxes (for an expected $3,600 annual tax bill). When taxes are due, her servicer pays the county on time. Alice likes that she never has to think about property taxes directly.
The downside is her mortgage payment went up by $50 this year because property taxes increased and her escrow had been underfunded. Thanks to escrow, she didn’t incur any late fees or penalties, but she did have to adjust her budget to the higher payment. She’s okay with it since the process was automatic and she avoided a surprise bill at tax time.
Example 2 – Bob (DIY Saver): Bob bought a home with a large down payment and opted to waive escrow. Instead of sending an extra $400 each month to a servicer, Bob sets that money aside in a high-yield savings account. When the property tax bill arrives, he pays it in two installments (roughly $2,400 each) right before the deadlines.
Bob enjoys having control (and even earns a bit of interest on the saved funds), but he knows he can’t miss those due dates. He set up automatic reminders and keeps a small cushion in his account. One year, the county increased his taxes by 5%, which Bob hadn’t expected – but his buffer covered it. That experience taught him to always keep some extra funds in reserve.
These examples show that escrow can shield you from administrative tasks and sudden big bills, whereas self-managing can yield minor financial perks and a sense of control. There’s no one-size-fits-all answer; it truly depends on your personality, habits, and comfort level with budgeting.
Conclusion
In the end, “better” depends on you. Paying property tax with your mortgage through an escrow account is often better for homeowners who value convenience, worry about missing deadlines, or are required to escrow due to loan rules. It wraps an important obligation into one easy payment and uses your lender’s system to ensure taxes (and insurance) are paid on time.
On the other hand, if you’re financially disciplined, understand how to manage the tax bills, and want full control of your money, you might prefer to pay property taxes on your own schedule. Just be sure to stay vigilant. The stakes are high – property taxes must be paid one way or another, and falling behind can have serious consequences.
You can also revisit your choice if your situation changes. For instance, after you build enough equity you might ask your lender about dropping escrow. Conversely, if handling large bills proves difficult, you could request that your lender set up an escrow for peace of mind. The goal is to avoid the worst-case scenario (unpaid taxes leading to a lien or foreclosure) while managing your finances in the way that works best for you.
Frequently Asked Questions (FAQ)
Q: Is property tax included in a mortgage payment by default?
A: Yes. Most mortgage lenders include property tax (and insurance) in your monthly payment through an escrow account, so it’s very common for mortgages to cover property tax unless you opt out.
Q: Do I have to escrow my property taxes with my mortgage lender?
A: No. If your lender allows it and you have sufficient equity (often 20%+ down), you can choose to pay property taxes yourself. Some loans (like FHA) do require escrow, but conventional loans may not.
Q: Can I pay my property taxes myself even if I have an escrow account?
A: No. If your mortgage has an active escrow account, let the servicer pay the tax bill. You shouldn’t pay it separately because that would duplicate payment – you already fund the escrow for taxes.
Q: Can I remove the escrow account from my mortgage later on?
A: Yes. Many lenders let you cancel escrow once you have around 20% equity and a solid payment history. You typically need to request it, and the lender might have specific requirements.
Q: Do escrow accounts pay interest to the homeowner?
A: No. In most states, escrow accounts earn no interest for you. A few states require interest to be paid, but even then the amount is very small.
Q: Will I lose my house if I don’t pay my property taxes?
A: Yes. Unpaid property taxes create a lien and can eventually lead to a tax foreclosure sale of your home. If you have a mortgage, the lender might step in to prevent that.
Q: Is it risky to handle property tax payments on your own without escrow?
A: Yes. It can be risky if you’re not organized. You must remember due dates and save money diligently. Missing payments leads to fees and could jeopardize your home, so self-paying requires good financial discipline.
Q: Does paying property taxes through escrow affect my tax deductions?
A: No. You can deduct property taxes (up to the SALT limit) whether you pay via escrow or directly. The payment method doesn’t change your deduction as long as the tax is paid.
Q: Are escrow accounts mandatory for FHA or VA loans?
A: Yes. FHA loans always require an escrow account for taxes and insurance. VA loans don’t require escrow by law, but many VA lenders still use escrow to ensure those bills are paid.
Q: Can I add an escrow for taxes later if managing them myself is hard?
A: Yes. If you initially waived escrow but later want it, you can ask your lender to set up an escrow account. Lenders are generally willing to add escrow if it helps you manage payments.