In most of the country, escrow accounts do not earn interest for the homeowner. Only 13 states require mortgage servicers to pay interest on escrow balances, and even in those states the mandated rates are low and may not apply if your loan is held by a national bank. Everywhere else, the money your servicer collects each month for taxes and insurance sits in the servicer’s account and generates nothing for you.
Why Federal Law Doesn’t Require Interest
The federal statute that governs mortgage escrow, 12 U.S.C. Section 2609, is focused on limiting how much a servicer can collect and requiring annual statements. It says nothing about paying you interest on the balance.1Office of the Law Revision Counsel. 12 USC 2609 – Limitation on Requirement of Advance Deposits in Escrow Accounts The implementing regulation, Regulation X, addresses how servicers compute balances, handle surpluses, and conduct annual analyses, but it also never mentions interest.2Consumer Financial Protection Bureau. 12 CFR 1024.17 – Escrow Accounts
Congress left the interest question to the states. Where a state hasn’t acted, the servicer has no obligation to pay anything, deposits the funds in its own accounts, and keeps whatever return they generate. The federal rules governing escrow still apply, including the cap under the Real Estate Settlement Procedures Act that limits deposits to one-twelfth of the annual tax and insurance bills plus a cushion of no more than two months’ worth of payments.3Consumer Financial Protection Bureau. Is There a Limit on How Much My Mortgage Lender Can Make Me Pay Into an Escrow Account That cushion keeps a meaningful balance in the account throughout the year, and in most states none of it earns anything for you.
States That Require Interest on Escrow
Thirteen states require lenders to pay interest on mortgage escrow accounts: California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin.4Office of the Comptroller of the Currency. Real Estate Lending Escrow Accounts If your property is in one of these states, your servicer must credit interest to the escrow account or pay it to you directly.
The rates are modest. California requires at least 2% simple interest per year on escrow for properties with one to four residential units. New York sets the same 2% floor for properties with one to six units, with authority for the state’s superintendent of financial services to prescribe a higher rate. The resulting dollar amounts are small. On an escrow account that averages a $3,000 balance, a 2% rate produces about $60 a year. Servicers typically credit the interest to the escrow balance annually, which slightly reduces your monthly payment or helps head off a shortage; some send an annual check instead.
Outside the 13 states, a servicer can voluntarily pay interest, but this almost never happens. There is no financial incentive for the servicer to share returns on money it holds at no cost.
What the National Bank Preemption Fight Means for You
Living in one of the 13 states does not automatically guarantee you interest. National banks chartered under the National Bank Act have long argued that federal law preempts state escrow interest requirements, and the Supreme Court took up the question in 2024.
In Cantero v. Bank of America, the Court addressed whether the National Bank Act preempts New York’s interest-on-escrow law. It didn’t issue a final answer. The Court held that lower courts had applied the wrong test and sent the case back with instructions to use a “practical assessment of the nature and degree of the interference” caused by the state law.5Supreme Court of the United States. Cantero v. Bank of America, N.A. (2024) Under that standard, a state law is preempted only if it “prevents or significantly interferes” with a bank’s exercise of its federally granted powers.
Before lower courts could work through the analysis, the Office of the Comptroller of the Currency moved to settle the question by regulation. In December 2025, the OCC published two proposed rules that would declare all 13 state interest-on-escrow laws preempted as applied to national banks.6Office of the Comptroller of the Currency. Preemption Determination on State Interest-on-Escrow Laws The OCC called these state laws an “unnecessary burden” on national banks. As of early 2026, these rules remain proposals in the comment period, not final regulations.
This matters practically. If your mortgage is serviced by a nationally chartered bank, the preemption question is unresolved and your right to escrow interest is uncertain. If it is serviced by a state-chartered bank or credit union, your state’s interest law applies without question. You can check your servicer’s charter type on the OCC’s or FDIC’s bank search tools.
Tax Treatment of Escrow Interest
Any interest you do earn on escrow is taxable income. If the total for the year exceeds $10, the servicer must report it to you and to the IRS on Form 1099-INT.7Internal Revenue Service. About Form 1099-INT, Interest Income If the amount falls below $10 and no form is issued, you are still technically required to report it. At the rates states mandate, the tax owed is negligible for most homeowners, but it belongs on your return.
Can You Opt Out of Escrow Instead?
If your escrow balance isn’t earning anything and you’d rather invest the money yourself, opting out is possible on some loans and not others.
Conventional Loans
Most conventional lenders allow escrow waivers if your loan-to-value ratio is 80% or below, meaning you have at least 20% equity. You typically also need a clean payment history with no delinquencies in the past 12 months, no prior loan modifications, and the loan must be at least a year old. Fannie Mae and Freddie Mac charge a one-time fee of about 0.25% of the loan amount for the waiver. On a $300,000 mortgage, that is roughly $750 at closing or at the time of the waiver.
Once you waive escrow, you take full responsibility for paying property taxes and insurance premiums on time. A missed tax payment can produce a lien on your home. If your insurance lapses, the lender will force-place a more expensive policy at your expense.
Government-Backed Loans
FHA loans require escrow for the life of the loan with no option to waive.8FHA Resource Center. Who May a Consumer Contact With Questions About Their Existing Escrow Account on an FHA-Insured Mortgage VA loans do not impose an absolute escrow requirement, and some VA borrowers can negotiate a waiver with their servicer, though individual lender policies vary.
A Note on Closing Escrow
The word “escrow” also describes the short-term holding account used during a home purchase, which a title company or escrow agent manages to hold earnest money until closing. That is a different product and does not follow the rules above. Closing escrow typically lasts 30 to 60 days, and the funds usually sit in a non-interest-bearing trust account; for small deposits, escrow agents commonly use pooled trust accounts where any interest generated goes to state legal aid programs. If the earnest money is large or the closing drags out, the purchase contract can place the funds in a separate interest-bearing account, with any interest generally belonging to the buyer and taxable as income.