Can a mortgage lender hold funds in escrow without paying interest?

Yes. Mortgage lenders are not required to pay borrower interest on the tax and insurance escrows their borrowers pay into every month. Lenders typically accumulate these funds and pay them on behalf of the borrower when they are due at the county either once or twice a year.

In addition, if a borrower made an additional payment which was meant to go toward principal but was NOT credited correctly could also sit in the escrow account not bearing interest as well. So make sure any prepayment of principal gets the proper credit by periodically checking your escrow balance.

Great question!