How Are Property Taxes Paid Through an Escrow Account?

Many mortgage lenders require that you pay property taxes and other property-related charges, such as homeowners insurance, through an escrow account rather than allowing you to pay the charges directly. An escrow account is an account set up by the lender with a third party to collect and hold the funds to pay the taxes and other charges when they become due.

In a typical tax escrow arrangement, the mortgage lender adds an amount to each monthly payment sufficient to cover the taxes and other charges by the time they come due. The mortgage lender then pays the taxes and other charges from the escrow account by the due date. The lender cant use funds in a tax escrow account for any purpose other than paying your property taxes, insurance and related charges. Property taxes typically are paid twice a year, although some local jurisdictions require quarterly payments, while others collect only once a year.

Your monthly mortgage statement should show the amounts collected for escrow and any amount disbursed from the account. Once a year, your mortgage company must provide you with a summary of collections and disbursements from your escrow account. Many local jurisdictions dont send tax bills to the mortgage company but instead bill the property owner directly. In such instances, its the owners responsibility to send a copy to his mortgage company so the taxes get paid on time. Local jurisdictions may penalize late payments, and it usually is the homeowners responsibility to pay any penalty.

Escrow accounts are all about peace of mind for both the lender and the borrower. For the borrower, an escrow account eliminates the need to make lump sum payments of taxes and insurance and ensures the homeowner wont fall behind on his taxes, insurance and other charges. For the lender, an escrow account protects against tax liens and uninsured losses the borrower cant cover.

The money in an escrow account at any one time will vary as money is collected and paid out. If theres an increase in the property tax bill or insurance premium, the lender will absorb the loss until it can adjust your monthly mortgage payment to account for the change. Lenders tend to require an escrow account if you have borrowed more than 80 percent of the appraised value of your home. Some lenders dont require escrow but may increase your interest rate to account for the risk that you may not pay your taxes or insurance. If your loan is sold to another company, you will have to live with the new lenders escrow policy.

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