An impound account, also known as an escrow account, is a prepaid account set up by a lender to collect the borrower’s property taxes and homeowners insurance premiums. These payments are a necessary part of home ownership and are part of a borrower’s regular monthly mortgage payment.
When the property tax or insurance bill is received, the lender will pay that bill on behalf of the borrower from the funds within the impound account ultimately freeing the borrower to keep a track on when they need to pay them.
After the impound account is initially set up with the loan, the borrower will make a monthly tax and insurance payment each month, with their standard mortgage payment.
Are Impounds Accounts Required?
Impound accounts are required if the borrower has chosen a government backed loan, such as an FHA or VA loan. An impound account for a Conventional loan is generally required if the borrower has put less than 10% down on a purchase.
Cancelling or removing an impound after it is setup on a government backed loan is not an option. An impound account on a Conventional loan can be waived if the borrower has at least a 20% equity in their property. Generally speaking, it is easier to add an impound account after the fact than it is to remove it.
The Advantages and Disadvantages of Impound Accounts
If you are deciding on whether or not to impound taxes and insurance to your next mortgage loan, it is important to know what the advantages and disadvantages of an impound account.
Advantages:
- “Hands Free” Budgeting – Rather than having to set money aside on your own for insurance and property taxes, you send the money to the loan servicer along with your monthly mortgage payment and then they pay the bills for you. No need to wonder if you set aside enough money for your property taxes and homeowners insurance.
- No Late Payments – Since the loan servicer is making the bill payments for you, they will make sure they are made on time. It is in their best interest that these bills are paid so they will not make them late.
Disadvantages:
- Additional Cash Needed – Impound accounts require initial deposits at the time of closing your purchase/refinance. Your lender will require a certain number of months of prorated property taxes and/or insurance premiums which means more cash will be needed to close. The amount needed will vary depending on when you close.
- Monthly Payment Can Change – Even if you have a fixed rate mortgage, your monthly payment for your impound account can change. Property tax bills and insurance premiums can fluctuate which means that your loan servicer may request additional funds each month to keep your impound account current.
- Funds Are Not Liquid – Your impound account is not a bank account. While it is your money, you can not make withdrawals from it like that of a bank account. If you want flexibility, an impound account would not provide that.
If you have any further questions regarding impound accounts, please contact us at (760) 930-0569.
