Escrow Accounts for Property Taxes: What Every Homeowner Should Know

Answer

An escrow account for property taxes is a special account your mortgage lender or servicer uses to collect and hold funds for your annual property tax bills. Instead of paying a large tax bill once a year, you contribute a portion of your taxes each month as part of your mortgage payment.

Here’s how it typically works:

• Monthly impound payments: Your lender estimates your annual property tax amount and divides it by 12. You pay this portion along with your principal, interest and (if applicable) homeowners insurance.
• Account funding: Each month’s impound portion goes into your escrow account. The lender holds these funds in trust until your local tax authority’s payment is due.
• Annual disbursement: When property taxes come due—often in one or two installments—the lender pays them directly from your escrow account, ensuring timely payment and avoiding penalties.

Using an escrow account for property taxes offers several advantages:

• Smooth budgeting: You spread a large tax bill across 12 months instead of facing a lump-sum payment.
• Avoiding late fees: Your lender ensures taxes are paid on time to prevent liens or penalties.
• Financial peace of mind: You don’t need to track and save separately for tax deadlines.

Keep in mind a few important points:

• Annual escrow analysis: Lenders must review your escrow account at least once a year. They adjust your monthly payment if taxes or insurance premiums change.
• Shortages and surpluses: If your escrow balance falls short, you may owe a catch-up payment or see your monthly mortgage increase. If it exceeds limits set by the Real Estate Settlement Procedures Act (RESPA), you may receive a refund.
• State and county differences: Property tax schedules, rates and due dates vary by jurisdiction. Check your county assessor’s website for exact dates and amounts (for example, HUD’s state resources).

While escrow accounts simplify tax payments, buyers are recommended to verify the estimated tax amounts at closing and review the Good Faith Estimate or Loan Estimate carefully. It’s advisable to consult a licensed mortgage professional or real estate attorney to confirm that your escrow arrangements comply with state regulations and RESPA guidelines.