Yes — for most borrowers, property taxes and homeowners insurance are included in a mortgage payment. The lender collects them monthly alongside principal and interest, holds the money in an escrow account, and pays the tax office and insurance company directly when the bills come due. Whether you can arrange things differently depends on your loan type, your equity, and your credit profile.
What Your Monthly Payment Actually Contains
A standard mortgage payment has four parts, often shortened to PITI: principal, interest, taxes, and insurance. Principal reduces your loan balance. Interest is what the lender charges to lend you the money. Those two stay with the lender. The other two — property taxes and homeowners insurance — are collected by the lender but paid out to third parties on your behalf.
Property taxes are set by local governments to fund schools, roads, police, and fire services. Rates vary widely, from under 0.5% of a home’s assessed value in some places to over 3% in others. Homeowners insurance covers physical damage from events like fire, windstorms, and certain natural disasters, and the national average premium has climbed in recent years into the low thousands annually, with far higher costs in disaster-prone areas.
Your monthly statement should break out each component so you can see exactly what’s going where. If you also pay private mortgage insurance, flood insurance, or HOA assessments, those usually appear as separate line items on the same bill.
How the Escrow Account Works
When your loan closes, the lender opens an escrow account tied to the mortgage. The servicer estimates the total annual cost of your property taxes and insurance, divides that figure by twelve, and adds it to your monthly principal-and-interest payment. The money accumulates in the account until a tax or insurance bill arrives, and the servicer pays it directly.
Because tax rates and insurance premiums change, your servicer runs an escrow analysis once a year. It compares what was collected against what was paid out, then adjusts next year’s monthly payment to match.
If There’s a Surplus
If the annual analysis shows a surplus of $50 or more, the servicer has to refund the excess to you within 30 days. If the surplus is under $50, the servicer can refund it or credit it toward next year’s escrow payments.1Consumer Financial Protection Bureau. 12 CFR Part 1024 (Regulation X) – 1024.17 Escrow Accounts
If There’s a Shortage or Deficiency
A shortage means the account balance came in lower than the target at the time of the analysis — the servicer underestimated what you’d owe. A deficiency is worse: the account went negative because the servicer advanced its own money to cover a bill.
Repayment rules depend on size. For a shortage equal to or greater than one month’s escrow payment, the servicer must spread repayment over at least 12 months. For smaller shortages, it can either collect within 30 days or spread it over a year. Deficiencies follow a similar structure but can be collected faster, in as few as two monthly installments when the amount equals or exceeds one month’s escrow payment.2eCFR. 12 CFR 1024.17 – Escrow Accounts
How Much the Lender Can Keep in the Account
The Real Estate Settlement Procedures Act, through Regulation X, caps how much a lender can hold. The servicer can require a reserve cushion for unexpected cost increases, but that cushion cannot exceed one-sixth of total estimated annual disbursements, which works out to roughly two months of escrow payments.2eCFR. 12 CFR 1024.17 – Escrow Accounts If your state law or mortgage documents set a tighter limit, that lower number controls.
The servicer also has to send you an annual escrow account statement within 30 days of the end of each computation year, listing all payments received and all disbursements made. Where future costs aren’t known, estimates can be based on the prior year’s charges, adjusted by no more than the annual change in the Consumer Price Index.1Consumer Financial Protection Bureau. 12 CFR Part 1024 (Regulation X) – 1024.17 Escrow Accounts
Why Lenders Require Escrow
Lenders bundle taxes and insurance into your payment to protect the collateral. If property taxes go unpaid, the local government can place a tax lien on the home. Tax liens generally take priority over the mortgage lien, which means the government could force a sale and leave the lender with nothing. An uninsured loss creates a similar problem: if fire or a major storm destroys the property, the lender is holding a loan backed by a ruined asset.
For government-backed loans, escrow is especially firm. FHA loans require servicers to establish and maintain an escrow account for taxes and hazard insurance, with limited waiver authority.3HUD. FHA Single Family Housing Policy Handbook VA loan guidance describes the monthly mortgage payment as including taxes and insurance, and notes that borrowers without an escrow account remain responsible for paying those bills on their own.4U.S. Department of Veterans Affairs. VA Home Loan Guaranty Buyer’s Guide
Can You Pay Taxes and Insurance Yourself Instead?
Some borrowers prefer to handle these bills independently. That’s called an escrow waiver, and it isn’t available to everyone. Fannie Mae’s guidelines favor escrow accounts, particularly for first-time buyers and borrowers with blemished credit, but allow lenders to waive the requirement case by case as long as the escrow provision stays in the mortgage documents.5Fannie Mae. Escrow Accounts
For higher-priced mortgage loans, federal rules are stricter. The lender has to maintain an escrow account for at least five years. After that, you can request cancellation, but only if your remaining balance is below 80% of the home’s original value and you aren’t delinquent. If those conditions aren’t met, the account continues.6Consumer Financial Protection Bureau. TILA Higher-Priced Mortgage Loans (HPML) Escrow Rule – Small Entity Compliance Guide
When a waiver is granted, your monthly payment drops to principal and interest only, and you take over the tax and insurance bills directly. Some lenders charge a one-time fee for the waiver, often around 0.25% of the loan balance, though practices vary. The upside is cash flow control. The downside shows up if you miss a payment.
What Happens If Your Insurance Lapses
If your homeowners coverage lapses — because you missed a premium on a self-pay arrangement, or because the insurer dropped you — the lender will buy a policy on your behalf. This is called lender-placed or force-placed insurance, and it protects the lender’s interest in the property. It generally does not cover your belongings or your liability.7NAIC. Lender-Placed Insurance
Lender-placed policies typically cost two to three times more than a standard homeowners policy, and you pay the premium. The servicer will also revoke any escrow waiver you had and set up an escrow account to collect for the force-placed coverage and recover any money it advanced.8Fannie Mae. Administering an Escrow Account and Paying Expenses Keeping continuous coverage and sending the servicer proof whenever you switch carriers avoids this outcome.
Flood Insurance Is Separate
Standard homeowners insurance does not cover flood damage. If your property sits in a Special Flood Hazard Area identified by FEMA, federal law requires the lender to make sure the home carries flood insurance for the life of the loan, at least equal to the outstanding balance or the maximum available under the National Flood Insurance Program, whichever is less.9Office of the Law Revision Counsel. 42 USC 4012a – Flood Insurance Purchase and Compliance Requirements and Escrow Accounts
The same statute requires flood premiums to be deposited into an escrow account and collected at the same frequency as your mortgage payments. When required, flood insurance gets rolled into your monthly payment the same way property taxes and standard homeowners coverage do.9Office of the Law Revision Counsel. 42 USC 4012a – Flood Insurance Purchase and Compliance Requirements and Escrow Accounts
PMI Is Not Homeowners Insurance
Private mortgage insurance (PMI) often appears on the same monthly statement as homeowners insurance, and the two get confused. They protect different parties. Homeowners insurance pays you if the property is damaged or destroyed. PMI pays the lender if you stop making payments — it offers you no protection, and you can still lose the home to foreclosure even with PMI in place.10Consumer Financial Protection Bureau. What Is Private Mortgage Insurance? PMI is typically required on conventional loans when your down payment is under 20%, and it may be collected alongside your escrow payments without being part of the taxes-and-insurance escrow itself.
Does the Money in Escrow Earn Interest?
Federal law does not require lenders to pay interest on escrow balances. The Office of the Comptroller of the Currency has treated the question as a business decision left to each national bank’s discretion.11Office of the Comptroller of the Currency. Notice of Proposed Rulemaking – Preemption Determination: State Interest-on-Escrow Laws Most lenders don’t pay interest.
At least a dozen states have passed laws requiring it, but in 2025 the OCC proposed that federal law preempts those state requirements for nationally chartered banks, arguing the mandates conflict with the discretion federal law gives banks. Whether your escrow earns interest depends on your lender’s charter type, your state’s law, and how that dispute gets resolved.