Interest on escrow is money your mortgage servicer pays you on the funds it holds to cover your property taxes and homeowners insurance. Federal law does not require it. About a dozen states do, and even in those states, whether you actually receive the interest may depend on whether your loan is serviced by a national bank or a state-chartered lender.
Why Your Lender Holds the Money
When you take out a mortgage, your servicer usually collects a portion of your property tax and insurance bills with each monthly payment and holds those funds in a dedicated escrow account. The servicer pays the tax authority and the insurer directly when bills come due. The arrangement protects the lender from tax liens and lapsed coverage on the property securing the loan. Balances in the account can run into the thousands of dollars at any given time, which is why the question of who earns interest on those funds matters.
Federal Law Does Not Require Interest on Escrow
The Real Estate Settlement Procedures Act and its implementing rule, Regulation X, set detailed requirements for how servicers manage escrow accounts, including collection limits and annual statements. Neither requires your lender to pay you interest on the balance.1Consumer Financial Protection Bureau. 12 CFR 1024.17 Escrow Accounts Absent a state law or a specific contract provision, the lender keeps whatever the funds earn.
FHA-insured mortgages sit in a middle position. HUD does not forbid or require interest on escrow, but if a lender chooses to invest the funds, any net income (after the cost of administering the account) has to be passed on to the borrower. The lender cannot charge more to run an interest-bearing escrow account than the account actually earns.2Department of Housing and Urban Development. HUD Escrow and Mortgage Insurance Premium
Which States Require Escrow Interest
According to a 2025 review by the Office of the Comptroller of the Currency, 12 states have mandatory interest-on-escrow laws that apply broadly to mortgage lenders. At least two others have narrower rules: one that is permissive rather than mandatory, and one that reaches only state-chartered banks.3Federal Register. Preemption Determination: State Interest-on-Escrow Laws
The required rate varies by state. Some set a fixed floor, commonly two percent per year. Others tie the rate to a treasury yield index such as the one-year constant maturity treasury rate published by the Federal Reserve. Whichever method the state uses, the figure is a minimum; your mortgage contract can promise more but cannot pay less.3Federal Register. Preemption Determination: State Interest-on-Escrow Laws
If you live in a state without one of these laws, your escrow funds sit in a non-interest-bearing account for the life of the loan unless your mortgage agreement says otherwise. Your state’s banking or mortgage lending statutes, or a direct question to your servicer, will confirm which category you fall into.
Why a National Bank Loan May Change the Answer
Even in states that require escrow interest, borrowers with mortgages serviced by national banks may not receive it. National banks have long argued that the National Bank Act preempts state escrow-interest requirements.
In May 2024, the U.S. Supreme Court in Cantero v. Bank of America, N.A. rejected a broad preemption test that would have swept aside almost all state laws touching national banks. The Court held that preemption of a state escrow-interest law requires a practical assessment of how much the law actually interferes with a national bank’s powers, and it sent the case back to a lower court to apply that standard.4Supreme Court of the United States. Cantero v. Bank of America, N.A.
In December 2025, the OCC proposed a rule that would formally preempt state interest-on-escrow laws for national banks and federal savings associations. If finalized, borrowers whose mortgages are serviced by those institutions would lose the right to escrow interest no matter what their state requires. Borrowers with loans from state-chartered banks and credit unions would still be covered by state law. As of early 2026, the proposal is in its comment period and has not been finalized.3Federal Register. Preemption Determination: State Interest-on-Escrow Laws
How Much You Actually Earn
In states that require it, the interest you receive depends on the applicable rate and your balance over the year. Lenders typically calculate interest on the average daily balance. Escrow balances climb month by month as you deposit and fall sharply when the servicer pays a tax or insurance bill, so daily averaging reflects the funds actually held rather than a high or low snapshot.
The dollar amounts are modest. On an average balance of $3,000 at two percent, you would earn about $60 for the year. When the rate is tied to a treasury index, earnings move with the market. Your annual escrow statement should identify the rate and index used.
The interest generally shows up as a credit to your escrow balance during the annual escrow analysis, which slightly reduces what you need to contribute the following year and, in turn, your monthly payment.1Consumer Financial Protection Bureau. 12 CFR 1024.17 Escrow Accounts Some state laws also bar servicers from charging fees that would push the effective rate below the statutory minimum.
Is Escrow Interest Taxable
Yes. Interest earned on an escrow account is taxable income. If your lender pays $10 or more in escrow interest during the year, it must report the amount to the IRS on Form 1099-INT and send you a copy.5Internal Revenue Service. About Form 1099-INT, Interest Income Interest under $10 is still reportable, either on Schedule B or directly on Form 1040, even if you never receive a form.
A Note on Rental Security Deposits
Rules for interest on rental security deposits are a separate legal regime. They live in state and local landlord-tenant statutes rather than in mortgage lending law, and requirements about separate accounts, notice, and how interest is paid or credited differ from the mortgage rules described here. If you are a tenant looking for the answer that applies to your deposit, your state’s landlord-tenant statute or a local tenant rights organization is the right starting point.
If Your Servicer Is Not Paying What Your State Requires
Start with a written request to your mortgage servicer. Cite the state statute and ask for an explanation of why interest does not appear on your annual escrow statement. Keep copies.
If the servicer does not resolve it, you can file a complaint with the Consumer Financial Protection Bureau online or at (855) 411-2372. The CFPB oversees mortgage servicers and can take up the issue on your behalf.6Consumer Financial Protection Bureau. What Should I Do If I’m Having Problems With My Escrow or Impound Account Your state banking regulator has authority over state-chartered lenders; the OCC accepts complaints against national banks.
Penalties vary by state and can include restitution of unpaid interest plus additional damages. Annual escrow statements are the strongest documentation for any complaint, so keep them.