Mortgage loans with less than 20 percent down potentially have a higher risk of default than loans with more than 20 percent down.  Loans that have escrow accounts are less likely to default.  Less money down would mean a higher risk for lenders.  With an escrow account, some of that risk is compensated and the lender is insured that the borrower will pay for their property taxes.

Every one or two years, the county collects property taxes and since you have an escrow account, your property taxes are automatically paid by your lender.  The escrow account works like a piggy bank.  You put in money every now and then, little by little.  Then when you need the money, it’s already saved up and ready to pay the taxes.

Mortgage lenders are very nervous when you have less than 20 percent down.  They do not want to worry about you paying your taxes on time.  This is because if the taxes are not paid, tax lien wills emerge under your title and your home can be sold out under your lender if the tax lien drags on.  An escrow account is an extra insurance for the lenders.

Lenders sometime even pay you to get an escrow account even when it’s not required.  This is called an “escrow waiver” fee.  When borrowers have more than 20 percent down, lenders will usually give them a ¼ point discount if they set up an escrow account.  On the other hand, if you refuse, the lender will charge you an extra ¼ point.

Federal law requires that when an escrow account is set up, not more than two months of property taxes plus fifty dollars could be in the account.  This is called the “cushion,” in case property taxes increase.

Your local appraisal district will determine your property taxes.  By the way, if your home is newly built, then the valuation may be done when it was just raw land.  If so, your property taxes would need to be updated because the taxes will be for the improved value, not just the land.

Are escrow accounts good or bad?  It is neither, but mortgage lenders love them.  It gives them extra insurance that would allow them to be more care free.  It is really a personal opinion.  If you like to invest then you probably would not be content to have an escrow account that would lock up some fund.  But if you like to save up for your property taxes then an escrow account is the way to go.