When you purchase a new home, one of the many decisions you will consider is whether or not you need an Escrow Impound Account, also known simply as an impound account. To help you understand what an impound account is and how it works, we’ve answered some commonly asked questions.
What is an impound account?
An impound account is set up and managed by mortgage lenders to pay property taxes and homeowners insurance on behalf of the home buyer. Lenders will collect these fees monthly along with your loan payment and pay the tax and insurance bills on your behalf when they are due. Although these insurance and tax payments are not technically part of your mortgage, they are necessary for you to keep your home, which means the lender has a vested interest in making sure they get paid. The impound account protects the lender and offers you some added convenience to ensure your bills are paid on time.
How is the account set up?
Your impound account is set up by your lender during escrow. Escrow is that period of time during which an impartial 3rd party (the escrow or title company) holds on to your earnest money and the house until the sales transaction is finalized and funds and property can be properly distributed. The escrow company will collect an Escrow Impound Deposit, which is typically 2-6 months’ worth of tax and insurance payments. Because property taxes may be adjusted and insurance premiums can change, this money is collected in advance to allow for possible increases and ensure that the lender has enough in the account to pay the bills when they are due.
How does an impound account work?
The lender divides the annual cost of each bill into a monthly amount and adds it to your mortgage payment. Each month when you make your mortgage payment, the funds for property tax and insurance are deposited into an account. When the time comes to pay the bills once or twice a year, the lender uses funds that have accumulated in that account to pay the bills on your behalf. Your monthly mortgage statement will show the balance in the account and your lender will review the account annually to ensure that the correct amount of money is being collected. It’s important to keep an eye on the account and be aware that your monthly payment could fluctuate based on adjustments to property taxes or insurance rates.
What happens to money in the account after the loan is paid off?
At the conclusion of the loan, whether you pay it off with cash, refinance, or sell the property, any money left in the impound account will be refunded to you.
Is an impound account required?
Impound accounts are not mandatory in all cases. You may elect to pay insurance and property taxes on your own. However, if you have a government loan with a low down payment option such as FHA, VA, or USDA, you will be required to have an impound account.
What are the pros and cons of an impound account?
Since property taxes and home insurance bills are only paid about twice a year, you may find it difficult to consistently set the money aside to pay them. The impound account allows you to pay large home expenses gradually throughout the year and avoid the sticker shock of being confronted with large bills a couple of times a year.
On the flip side, pre-paying several months’ worth of taxes and insurance at closing may be a deterrent if you don’t have the cash on hand. Also, if you can be disciplined about saving for those bill payments, you may prefer to set the money aside in your own high-interest savings account instead.
If you have questions about which loans and payment account options may be right for you, contact a loan advisor who can review your situation and explain your choices.
By Amy Malloy