Interest on escrow is money your mortgage servicer or landlord pays you on the funds they hold in a dedicated account for property taxes, homeowners insurance, or a rental security deposit. Federal law does not require mortgage lenders to pay it. About a dozen states do, usually at either a flat two percent or a rate tied to a one-year treasury index. Whether you actually see any of that money depends on where the property sits and, for mortgages, whether your loan is serviced by a national bank or a state-chartered institution.
What Escrow Is and Why the Money Sits There
When you have a mortgage with an escrow account, part of your monthly payment goes into that account on top of principal and interest. The servicer uses those funds to pay your property tax bills and homeowners insurance premiums when they come due. Balances can run into the thousands of dollars at a time, which is why the question of who earns interest on that money matters.
Nothing in the Real Estate Settlement Procedures Act or Regulation X requires a servicer to pay you interest on escrow. RESPA sets rules on how much can be collected and when statements must go out, but the interest question is left to state law and to your mortgage contract.1Consumer Financial Protection Bureau. 12 CFR 1024.17 Escrow Accounts Absent a state requirement or a contract term in your favor, the lender keeps any earnings the funds generate.
Which States Require Interest on Escrow
A 2025 review by the Office of the Comptroller of the Currency identified 12 states with mandatory interest-on-escrow laws that apply broadly to mortgage lenders. At least two more have narrower rules: one that is permissive rather than mandatory, and another that reaches only state-chartered banks.2Federal Register. Preemption Determination: State Interest-on-Escrow Laws
The rates come in two basic shapes. Some states set a flat statutory minimum, commonly two percent per year. Others peg the required rate to a treasury yield, such as the one-year constant maturity treasury rate published by the Federal Reserve. Either way, the number is a floor. Your mortgage contract can promise more, but not less.2Federal Register. Preemption Determination: State Interest-on-Escrow Laws
If your property is in a state without such a law, and your loan documents are silent, your escrow funds will sit in a non-interest-bearing account for the life of the loan. The fastest way to check is to look up your state’s mortgage lending or banking statutes, or ask your servicer directly and get the answer in writing.
How the Interest Is Calculated and Paid
Where interest is required, lenders typically calculate it on the average daily balance in the account. Escrow balances climb each month with your deposits and drop sharply when a tax or insurance bill gets paid, so averaging the daily balance reflects what the servicer actually held over the year.
The dollar figures are usually modest. On a $3,000 average balance at two percent, you earn roughly $60 for the year. When the rate is tied to a treasury index, the number moves with the market, and the specific index and rate should appear on your annual escrow statement.
Payment normally comes as a credit applied during the annual escrow analysis. The servicer adds the interest to your escrow balance, which reduces what you need to fund for the next year’s tax and insurance bills and can shave a small amount off your monthly payment. Your annual escrow statement, which the servicer must send within 30 days of completing the analysis, is where you verify the credit.1Consumer Financial Protection Bureau. 12 CFR 1024.17 Escrow Accounts Some state laws also bar the servicer from charging account fees that would effectively drop the interest rate below the statutory floor.
The National Bank Exception
Even in a state that requires escrow interest, your loan may be outside its reach. Whether state escrow-interest laws apply to national banks has been actively litigated, and the answer is not settled.
In May 2024, the U.S. Supreme Court decided Cantero v. Bank of America. The Court held that determining whether a state escrow-interest law is preempted by the National Bank Act requires a “practical assessment of the nature and degree of the interference” the state law causes to a national bank’s powers. It rejected a broader test that would have wiped out most state laws touching national banks and sent the case back to a lower court for a more detailed analysis.3Supreme 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 the institutions it regulates, meaning national banks and federal savings associations would not need to comply with any of the state requirements. As of early 2026 the proposal is still in the comment period and has not been finalized.2Federal Register. Preemption Determination: State Interest-on-Escrow Laws If it is adopted, borrowers whose mortgages are serviced by a national bank would lose the right to escrow interest regardless of state law. Borrowers with mortgages held by state-chartered banks and credit unions would still be covered by their state’s statute.
Taxes on Escrow Interest
Interest paid on an escrow account is taxable income. If your lender pays you $10 or more in a year, it must report the amount to the IRS on Form 1099-INT and send you a copy.4Internal Revenue Service. About Form 1099-INT, Interest Income Amounts under $10 are still reportable on your federal return even without a 1099-INT, as interest income on Schedule B or directly on Form 1040.
Interest on Rental Security Deposits
Escrow interest is not only a mortgage question. Many states and some local jurisdictions require landlords to hold security deposits in interest-bearing accounts and to pay or credit the earnings to the tenant. These rules live in landlord-tenant statutes rather than mortgage lending codes, and the specifics differ, but the common obligations are:
- Hold the deposit in a separate account, not commingled with the landlord’s operating or personal funds.
- Give you the name and address of the bank holding the deposit, and in some jurisdictions the interest rate being paid.
- Pay or credit interest on a set schedule, either annually, against rent, or with the deposit at move-out.
Penalties for noncompliance can go beyond simply paying what is owed. Some jurisdictions let tenants recover a multiple of the withheld amount. Your state attorney general’s office or a local tenant rights organization can point you to the exact rule that applies.
If Your State Requires Interest and You Are Not Getting It
Start with your servicer in writing. Ask for an explanation, cite the specific state statute, and keep a copy of the correspondence. Pull your annual escrow statements together; those are your documentation of what was and was not credited.
If the servicer does not fix it, file a complaint with the Consumer Financial Protection Bureau online or by phone at (855) 411-2372. The CFPB oversees mortgage servicers and can intervene.5Consumer Financial Protection Bureau. What Should I Do If I’m Having Problems With My Escrow or Impound Account You can also complain to your state’s banking regulator, which has authority over state-chartered lenders, or to the OCC for loans serviced by national banks. State penalties for failing to pay required escrow interest vary and can include restitution of all unpaid interest plus additional damages.