Why does my mortgage payment include property taxes?

Most lenders require an escrow account that collects your property taxes and homeowners insurance monthly, then pays those bills on your behalf when they're due. It protects the lender — unpaid property taxes can create a lien that takes priority over the mortgage.

Why did my mortgage payment go up when my loan rate didn't change?

Your escrow payment is recalculated annually. If your property taxes or homeowners insurance went up, your servicer collects more each month to cover the higher bills. The principal and interest portion doesn't change on a fixed-rate loan, but the escrow portion can.

What is an escrow shortage and how do I handle it?

An escrow shortage happens when your servicer paid out more than your account held — usually because taxes or insurance increased unexpectedly. You'll receive a notice giving you the option to pay the shortage upfront or spread it over 12 months added to your payment.

Can I get rid of my escrow account?

Sometimes. Most lenders require escrow when LTV is above 80%. Once you've built 20% equity and have a good payment history, you may be able to request escrow waiver. FHA and VA loans often don't allow it. Some lenders charge a small fee (0.125%–0.25% rate adjustment) to waive escrow.

Are property taxes paid through escrow still deductible?

Yes. Even though your servicer makes the payment, you get the deduction — the amount actually paid to the taxing authority during the calendar year appears on your Form 1098. Note: the SALT cap limits this deduction to $10,000 total (property taxes + state income taxes).

Property Taxes and Your Mortgage Escrow, Explained

When you close on a home with a mortgage, your lender almost certainly requires an escrow account. Every month, a portion of your payment goes into that account — held by your servicer until your property tax bill comes due. It sounds simple. In practice, there are enough moving parts that mistakes happen all the time.

What Escrow Actually Is

An escrow account is a holding account managed by your mortgage servicer. They collect money from you each month for two things: your property taxes and your homeowners insurance. When those bills come due, your servicer pays them on your behalf. This is governed by the Real Estate Settlement Procedures Act (RESPA), which limits how much a servicer can hold as a cushion.

How Your Monthly Payment Breaks Down

Most homeowners know the "PITI" acronym: Principal, Interest, Taxes, Insurance. Your monthly statement should show each piece. If you have a $2,400 payment, it might look something like:

Principal: $450
Interest: $1,350
Property taxes (escrow): $450
Homeowners insurance (escrow): $150

The escrow portion — $600 in this example — doesn't reduce your loan balance. It sits in the account until your servicer needs to pay a bill.

Why Your Payment Changes Year to Year

Every year, your servicer does an escrow analysis — typically in the same month each year. They look at what they actually paid out last year and what they project for the coming year. If your property taxes went up, your escrow payment goes up.

Federal law (RESPA) allows servicers to keep a cushion of up to two months of escrow payments on top of expected bills. That means they may be holding more of your money than strictly necessary.

Escrow Shortfalls and Surpluses

Shortfall: If the servicer paid out more than your escrow balance covered, they'll bill you for the difference. You can typically pay the shortfall upfront or spread it over 12 months.

Surplus: If there's more in your account than needed (over $50 above the required cushion), the servicer is required to refund it — usually as a check a few weeks after your analysis.

How to Catch Errors

Signs something is off with your escrow:

Your payment increases sharply without a corresponding change in your tax bill or insurance premium
You receive a delinquency notice from your county tax office
Your escrow analysis shows a large shortfall even though you haven't had a tax increase

To check your servicer's math: look up your actual annual property tax bill from your county assessor's website, add your annual insurance premium, divide by 12, then add two months' worth as the cushion (divide the annual total by 6 and add that). That's the maximum your servicer should be collecting monthly.

Can You Remove Escrow?

Most lenders require escrow when LTV is above 80%. Once you've built enough equity and maintained a good payment history, you may be able to request an escrow waiver. Some lenders charge a fee (often 0.125% to 0.25% rate adjustment). FHA loans generally don't allow escrow removal.

Your Property Taxes Are Still Deductible

Even though your servicer pays your taxes from escrow, you're the one who gets the deduction. The amount appears on your Form 1098. Note: the SALT deduction including property taxes is capped at $10,000 per return — verify the current limit with a tax professional for 2025.