Interest on escrow is the return your mortgage servicer pays you for holding your money in an escrow account between the time you deposit it and the time it goes out to cover property taxes and homeowners insurance. Federal law does not require it. About a dozen states do, and even in those states a pending federal rule may let national banks off the hook. Whether you earn anything, and how much, comes down to three things: the state your property sits in, the rate formula that state uses, and the type of institution servicing your loan.
States That Require Escrow Interest
Twelve states have laws requiring mortgage lenders to pay interest on escrow balances: California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin.1Federal Register. Preemption Determination: State Interest-on-Escrow Laws Iowa and New Hampshire have related statutes, but Iowa’s is permissive rather than mandatory and New Hampshire’s reaches only state-chartered banks. If your property is not in one of the twelve mandatory states, your servicer has no legal obligation to pay you anything on the balance it is holding.
How Much You Actually Earn
Two kinds of rate formulas are in use. The first is a fixed floor. California and New York each set a minimum of 2% simple interest per year on escrow funds for residential properties. The second ties the rate to an external benchmark, typically short-term Treasury yields. Maryland uses the weekly average yield on one-year U.S. Treasury securities, so the rate moves with the market. In a low-rate environment the fixed-floor states tend to pay more; when market rates rise, the indexed states catch up or surpass them.
The underlying math is the same either way. Your servicer figures the average daily balance in your escrow account over the computation period, adding up each day’s balance and dividing by the number of days, then applies the annual rate to that figure. Because higher property tax bills mean larger balances sitting for longer stretches between disbursements, interest tracks tax burden more than loan size. A homeowner paying $8,000 a year in property taxes will earn roughly twice the interest of one paying $4,000, holding everything else equal.
How inflated the balance is also matters. Under the federal Real Estate Settlement Procedures Act, your servicer can hold a cushion of no more than one-sixth of the estimated total annual disbursements from the account.2eCFR. 12 CFR 1024.17 – Escrow Accounts On $6,000 of annual taxes and insurance, that caps the cushion at $1,000. A servicer that overcharges the cushion inflates the balance, and in a state that requires interest, owes you more as a result.
Why National Bank Borrowers Often Collect Nothing
This is where most borrowers run into trouble. If your mortgage is serviced by a large national bank, meaning Bank of America, JPMorgan Chase, Wells Fargo, U.S. Bank, or a similar federally chartered institution, your state’s interest-on-escrow law may not apply to your loan at all.
The National Bank Act gives federally chartered banks powers that can override state law when a state requirement “prevents or significantly interferes” with those powers. In 2024, the Supreme Court addressed the escrow-interest version of that conflict in Cantero v. Bank of America, brought by New York borrowers whose national bank refused to pay the state-mandated 2%.3Supreme Court of the United States. Cantero v. Bank of America, N.A. The Court did not decide whether New York’s law was preempted. It vacated the lower court’s decision and sent the case back, holding that courts must make a practical, case-by-case assessment of how much a state law actually interferes with national bank operations before declaring it preempted.
Before that remand produced an answer, the Office of the Comptroller of the Currency proposed a sweeping rule in late December 2025 that would settle the question by regulation. The proposed rule declares that federal law preempts all twelve state interest-on-escrow laws as applied to national banks and federal savings associations, plus any other state law with equivalent terms.1Federal Register. Preemption Determination: State Interest-on-Escrow Laws The public comment period closed January 29, 2026, and the rule has not been finalized. If adopted, national banks could choose whether to pay escrow interest regardless of what state law says.
State-chartered banks, credit unions, and non-bank mortgage servicers are not covered by the National Bank Act and remain bound by their state’s escrow interest law. The institution type matters as much as the property location. You can check whether your servicer is a national bank by looking for “N.A.” or “National Association” in its legal name, or by searching the OCC’s list of supervised institutions.
When the Money Reaches You
In states that require it, servicers typically pay escrow interest once a year, during or shortly after the annual escrow analysis. The most common method is a credit applied directly to your escrow balance, which either reduces your next monthly payment or offsets a projected shortage. Some servicers issue a separate check or electronic deposit, but the credit approach is far more common because it keeps the money inside the escrow system.
Your annual escrow statement should show the total interest earned and how it was applied. If the statement does not break out interest as a separate line item and you live in a state that requires payment, contact your servicer in writing. A formal written inquiry triggers RESPA’s error resolution timeline, which requires the servicer to acknowledge your letter within five business days and resolve the issue within 30.
Taxes on Escrow Interest
The IRS treats escrow interest the same as interest from a savings account. It is taxable income in the year you receive or are credited it. If your servicer pays you $10 or more in escrow interest during the calendar year, it must report the amount on Form 1099-INT and furnish a copy to you by January 31 of the following year.4Internal Revenue Service. About Form 1099-INT, Interest Income
Even if your escrow interest comes in below $10 and no 1099-INT ever arrives, you are still required to report it. The IRS position is that all taxable interest must appear on your federal return regardless of whether you receive a form.5Internal Revenue Service. Topic No. 403, Interest Received For most homeowners the amount is small enough to go on line 2b of Form 1040 without any additional forms. Schedule B only becomes necessary if your total taxable interest from all sources exceeds $1,500 for the year.6Internal Revenue Service. Instructions for Schedule B (Form 1040) Escrow interest rarely approaches that threshold on its own.
What to Do If Your Lender Is Not Paying
If you live in a state that requires escrow interest and your servicer is not a national bank, start with a written request asking for an accounting of interest owed. Cite your state’s escrow interest statute and ask for a corrected escrow statement. If the servicer ignores you or refuses, file a complaint with the Consumer Financial Protection Bureau, which oversees mortgage servicing and typically forwards complaints to the servicer with a 15-day response window. You can also file with your state’s banking regulator, which has direct authority over state-chartered lenders and non-bank servicers.
If your servicer is a national bank, the situation is less settled. Until the OCC finalizes its proposed preemption rule or courts work through the issue on remand from Cantero, national banks may argue they have no obligation. Some are paying voluntarily; others are not. A complaint about a national bank’s escrow practices goes to the OCC rather than your state regulator, so confirming the charter type first saves time.
Opting Out of Escrow Instead
If earning minimal interest on money you cannot touch is enough to push you out of the arrangement, waiving escrow may be available. Lenders generally allow borrowers to drop escrow once the loan-to-value ratio falls below 80%, meaning you have at least 20% equity in the home. Some lenders charge a one-time waiver fee of around 0.25% of the loan balance, about $625 on a $250,000 mortgage.
Without escrow you handle property taxes and insurance premiums yourself. That means tracking due dates, budgeting for lump-sum bills, and absorbing the risk of a lapse if you miss one. In exchange you get full control of funds that could earn a higher return in a savings or money market account. Federally backed loans, including FHA, VA, and USDA mortgages, generally require escrow for the life of the loan and do not permit waivers.