What Homebuyers Should Know About Escrow and Property Taxes

16 September 2025

When you're buying a home, there's a lot to wrap your head around—closing costs, mortgage terms, inspections, and, of course, escrow and property taxes. These financial aspects can feel overwhelming, but they’re essential to homeownership. So, let’s break it down in a way that actually makes sense.

What is Escrow, and Why Does It Matter?

Buying a home is a massive financial move, and escrow is what keeps everything in check. It’s basically a neutral third-party account that holds money or important documents until all conditions in a real estate transaction are met. Think of it as a safety net that ensures both the buyer and seller stick to their end of the deal.

How Does Escrow Work in Home Buying?

Escrow plays an essential role in the home-buying process, and here's how:

1. Opening an Escrow Account – Once you and the seller agree on the deal, an escrow account is created with a third party, like a title company or an escrow firm.
2. Depositing Earnest Money – You, as the buyer, put down an earnest money deposit—a sign of good faith that shows you're serious about the deal. This money stays in escrow until closing.
3. Completing Contingencies – The escrow holds funds while things like home inspections, appraisals, and financing approvals get completed.
4. Closing the Sale – Once everything checks out, the escrow company releases funds to the seller, and you officially become a homeowner.

Escrow Accounts After You Buy a Home

Escrow doesn’t disappear after you get the keys. If you have a mortgage, your lender may set up an escrow account to handle property taxes and homeowners insurance. Instead of paying these expenses separately, a portion of your monthly mortgage payment goes into the escrow account.

When your property taxes and insurance premiums are due, your lender pays them on your behalf using funds from this account. This helps prevent accidental late payments and keeps things hassle-free.

Property Taxes: What Every Homebuyer Should Know

Property taxes are an unavoidable part of homeownership. They help fund local schools, emergency services, road maintenance, and other community essentials. But how exactly do they work?

How Property Taxes Are Calculated

Property taxes aren’t just a random number; they’re based on the assessed value of your home and your local tax rate. Here’s the breakdown:

1. Assessed Home Value – A local tax assessor determines how much your home is worth.
2. Local Tax Rate – Your city or county sets a tax rate, often expressed as a percentage (e.g., 1.5%).
3. Final Tax Bill – Your property tax bill is the assessed home value multiplied by the tax rate.

For example, if your home is valued at $300,000 and your local tax rate is 1.5%, you’d owe $4,500 in property taxes per year.

How Often Are Property Taxes Paid?

Most homeowners pay property taxes through their mortgage lender via an escrow account. Instead of writing a large check once or twice a year, the cost is divided into monthly mortgage payments.

However, if you own your home outright or if escrow isn’t required by your lender, you’ll need to pay your property taxes directly—typically once or twice a year, depending on your state.

Can Property Taxes Go Up?

Absolutely! Property taxes aren’t fixed. They fluctuate based on:

- Market Value Increases – If home prices in your area rise, your property’s assessed value might go up, leading to higher taxes.
- Local Government Budget Changes – If your city or county needs more funding, they may increase tax rates.
- Reassessments – Some states require reassessments every few years, which could impact your tax bill.

Escrow vs. No Escrow: What’s the Better Option?

Many mortgage lenders require an escrow account, but in some cases, you might have the option to handle taxes and insurance independently.

Benefits of an Escrow Account

1. Simplified Payments – Your lender handles tax and insurance payments for you.
2. No Big Annual Bill – Instead of a lump sum tax payment, costs are spread out over 12 months.
3. Avoid Late Fees – Your lender ensures on-time tax and insurance payments.

Downsides of an Escrow Account

1. Higher Monthly Mortgage Payment – Your mortgage payment includes taxes and insurance, making it larger than just the principal and interest.
2. Less Control Over Payments – You don’t directly manage when property taxes and insurance get paid.

Benefits of Handling Property Taxes and Insurance Yourself

1. Better Cash Flow Control – You manage when and how you pay property taxes and insurance.
2. Potential for Interest Gains – Money that would sit in escrow could be earning interest in your own account.

Downsides of Skipping an Escrow Account

1. Large Lump-Sum Payments – You’ll need to budget for big tax and insurance payments.
2. Risk of Forgetting or Missing a Payment – Late payments can lead to penalties or even foreclosure in extreme cases.

How to Lower Your Property Tax Bill

Nobody enjoys paying property taxes, so here are some strategies to keep them as low as possible:

1. Check Your Home’s Assessment

If your home is assessed at a much higher value than comparable homes in your neighborhood, you might be overpaying. You can appeal the assessment with your local tax office.

2. Look for Exemptions

Many states offer property tax exemptions for:

- Seniors
- Veterans
- People with disabilities
- Homeowners with primary residences

Check with your local tax office to see if you qualify for any tax breaks.

3. Avoid Home Improvements That Raise Value

Renovations like adding a new bedroom or upgrading to a gourmet kitchen can increase your home’s assessed value, leading to higher property taxes. If you’re concerned about taxes, think carefully before making major upgrades.

4. Compare Tax Rates Before Buying

If you’re still house-hunting, research tax rates in different neighborhoods. Some areas have significantly lower property taxes than others, which could save you thousands in the long run.

The Bottom Line

Escrow and property taxes may not be the most exciting part of buying a home, but understanding how they work can save you from financial surprises. Whether your lender handles them through an escrow account or you pay them yourself, these costs are a critical part of homeownership.

Take the time to crunch the numbers, explore ways to manage your property taxes, and make sure you’re prepared for the financial responsibilities that come with owning a home. With the right knowledge, you'll feel more confident in your real estate journey!