Interest on mortgage escrow is not required by federal law, and only about 15 states require servicers to pay it. Whether the money your servicer collects each month for property taxes and homeowners insurance earns anything for you depends almost entirely on the state you live in and, increasingly, on who services your loan.
Which States Require Servicers To Pay Interest
The Real Estate Settlement Procedures Act governs how mortgage escrow accounts work at the federal level, but it says nothing about paying interest to the borrower. Roughly 15 states have filled that gap with their own statutes, spread across the Northeast, Midwest, and West Coast. The required rate varies by state. Some fix a flat minimum percentage. Others tie the rate to a market index or to what banks pay on comparable savings accounts.
The dollar amounts tend to be modest. Escrow balances rise and fall through the year as tax bills and insurance premiums come due and get replenished, so there is rarely a large balance sitting still long enough to earn much. In the remaining states, no interest requirement applies, and the servicer keeps whatever the bank pays on the pooled funds.
When interest is required, you usually don’t receive a check. The servicer credits the interest back into the escrow account itself, which lowers your future monthly escrow payment or offsets a shortfall caught during the annual escrow analysis.
The Cushion Earns Interest Too
Federal rules let a servicer hold a cushion in your escrow account to cover unexpected cost increases and timing gaps. That cushion cannot exceed one-sixth of the estimated total annual escrow disbursements.1eCFR. 12 CFR 1024.17 – Escrow Accounts On a home with $6,000 in annual property taxes and insurance, that works out to a cushion of up to $1,000 on top of the normal monthly accumulation. In states that mandate interest, the entire balance including this cushion earns it.
A Federal Proposal That Could Override State Law
In 2025, the Office of the Comptroller of the Currency proposed a rule concluding that federal law preempts state interest-on-escrow requirements for national banks, federal savings associations, and covered savings associations.2Office of the Comptroller of the Currency. Preemption Determination on State Interest-on-Escrow Laws – Notice of Proposed Rulemaking The proposal specifically targets about a dozen state laws with substantively similar interest-on-escrow requirements. If finalized, OCC-regulated banks could decide for themselves whether to pay interest on escrow, regardless of what state law says.
This matters because many borrowers whose state law currently guarantees escrow interest have loans serviced by national banks covered by the proposal. If the rule takes effect, those borrowers could lose the interest credits they’ve been receiving. The rule was still in the proposed stage as of mid-2025, with a public comment period underway. If you live in one of the affected states and your servicer is a national bank, the outcome of that rulemaking will decide whether your escrow keeps earning anything.
Opting Out of Escrow To Earn Your Own Interest
If your escrow earns little or nothing, one alternative is to pay taxes and insurance yourself and hold the money in a savings account that does pay interest. This is called an escrow waiver, and whether you can get one depends on your loan type and equity.
For conventional loans sold to Fannie Mae or Freddie Mac, lenders generally require sufficient equity before approving a waiver. Fannie Mae’s selling guide directs lenders to consider more than the loan-to-value ratio, including whether you can handle lump-sum tax and insurance payments on your own.3Fannie Mae. Escrow Accounts – Fannie Mae Selling Guide Most lenders set the floor around 20% equity, though some allow waivers with as little as 5%. Expect a one-time fee, often around 0.25% of the loan amount.
Government-backed loans are less flexible. FHA requires an escrow account for the entire life of the loan and does not allow waivers regardless of equity or payment history. VA loans allow waivers in some cases but still impose equity requirements. If your loan is FHA-insured, escrow is a permanent part of your monthly payment and the interest question is settled by default.
Tax on Escrow Interest You Do Receive
Any interest credited to your escrow account is taxable income, even though you never held the cash. The IRS treats a credit to the account the same as a payment to you.
Your servicer must issue you IRS Form 1099-INT if the interest paid or credited during the calendar year totals $10 or more.4Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID You report the amount on your return for the year the interest was made available to you, not necessarily the year you received a check.5Internal Revenue Service. About Form 1099-INT, Interest Income If you earn under $10 and don’t receive a 1099-INT, you are still technically required to report the income. The $10 figure is a reporting threshold for the payer, not an exemption for you.
What Happens to the Balance if the Bank Fails
Your escrow money sits in a bank account controlled by your servicer, which raises the question of what happens if the bank fails. Escrow funds qualify for FDIC pass-through insurance, so each borrower’s share is insured separately up to $250,000 as if the borrower had deposited the money directly.6FDIC. Pass-Through Deposit Insurance Coverage For that protection to work, the bank’s records need to show that the funds belong to individual borrowers rather than to the servicer. Your escrow balance is almost certainly well below $250,000, so the practical exposure is minimal as long as the servicer keeps proper records.