Escrow accounts, referred to in some areas as impound accounts, are basically accounts set up outside of a mortgage payment. Each month, 1/12th of the annual insurance and property tax bill is paid each month into this little ‘kitty’ and when insurance and property taxes are due, they’re paid for from the escrow account. Should you establish one yourself?
First, most of the time you don’t have an option as they’ll be required. Typically, for loans with a down payment of less than 20% of the property’s value, they’ll be a requirement. For loans with a down payment of 20% or more, they become an option. If you have a down payment of 20% or more, should you establish these accounts?
Personally, it’s really a matter of preference at this stage. When I had a mortgage, I also had solid equity, but I chose to establish these accounts as I would rather pay a little bit each month instead of one big bill at the end of the year. If you do have an option, you can indeed set one up on your own. Once you do, you can always cancel it if you change your mind.
If you start with less than 20% down, but soon the property appreciates to the point where you do have more equity, you can get with your lender and have them removed. The lender may require an appraisal to establish the new value, so be prepared for that possibility. If you’re not sure, a quick phone call to your lender will clear all that up.
My home was in Texas, so the property taxes were a bit on the high side. Texas doesn’t have a state income tax, but that shortfall is made up by property taxes. That said, the property taxes were higher compared to some other states. If where you live you don’t have a state income tax, property taxes will likely be elevated compared to some other states.
Government-backed loans such as FHA or USDA loans require little to nothing down which will also mean escrow accounts will be established for these loans. To establish, lenders ask for at least two months of payments to be held in reserve. This is a lender call so some lenders might ask for just one month
Escrow accounts are neither a good thing nor a bad thing, just a lender requirement. If you have questions about these accounts, your lender can answer them for you.
