What Is An Impound Account?
An impound account (or escrow account, as it’s also commonly known) is set up by your mortgage lender as a means through which to collect insurance and tax payments. Its purpose is to help cover property-related expenses besides those directly generated by the mortgage itself.
If your lender requires you to make certain payments – for example, insurance and taxes − through an escrow or impound account, know that it’s a common and widely accepted practice. That’s because an impound account serves as a helpful means to make sure that certain types of expenses are paid in timely fashion.
Understanding Escrow Or Impound Accounts
An impound account is the same as an escrow account, as it’s more commonly known in general parlance. This type of account exists to store funds that you’ve set aside to pay for real estate-related expenses beyond your mortgage − like insurance and property taxes.
The impound account, which is managed by your mortgage lender, holds funds collected for homeowners insurance, mortgage insurance premiums and property tax payments on your house. As you might imagine, the amount of these payments will differ based on several factors including mortgage type and amount, property type and location, down payment, loan to value ratio and various government-assessed determinations.
The amounts that your lender will collect in these accounts may not be sufficient to cover all your costs if your insurance premiums or taxes increase over time. If such a shortage occurs, you’ll need to pay the remaining expenses.
When Do You Set Up An Impound Account?
An escrow or impound account will be set up as you go through the mortgage loan process and head into closing. Your mortgage lender and title company will work with you to create it as part of closing procedures.
As the impound or escrow account will be managed by your mortgage lender, you won’t have to be worried about maintaining it on a day-to-day basis yourself. Rather, you’ll regularly pay funds into it as you make monthly mortgage payments.
Are Impound Accounts Required For A Mortgage?
In most cases, yes. Impound accounts may be required depending on different loan types, and are routinely-utilized by many mortgage providers as a way through which to ensure the smooth collection of funds relating to property taxes and insurance.
Homeowners that buy a house using a conventional mortgage with less than a 20% down payment can expect to have an impound account for their mortgage payments, depending on location. Likewise, some government-backed loans such as FHA loans or USDA loans come with impound account requirements attached.
Mind you: Borrowers with high credit scores and low loan-to-value ratios may be able to arrange to get their impound accounts waived. But in this circumstance, it does not waive the requirement to still make timely payments on taxes and insurance.
Managing Your Impound Account
Insurance and tax payments are collected automatically in the impound or escrow account, making it easier for homeowners to manage. If you have questions about how much money is in your escrow or impound account, simply contact your home mortgage provider. Many loan providers may offer access to this information via their websites, annual tax statements and/or monthly billing statements as well.
Can You Close An Impound Account?
The short answer: Yes, in certain cases, you may be eligible to close your escrow or impound account. For example, if you’ve built up 20% equity in your home, your loan provider may be willing to waive certain account requirements.
That said, many borrowers tend to keep impound/escrow accounts in place, given their ease of use and the assistance that they help provide in ensuring that borrowers make timely payments.
Advantages Of Impound Accounts
- Property taxes and home insurance premiums are paid on time. Maintaining impound accounts provides a handy way through which to facilitate regular and routine on-time payment of home insurance and property tax premiums.
- Lenders are responsible for making impound account payments. You can enjoy greater peace of mind knowing that your lender will handle the task of making homeowners insurance and property tax payments on time.
- Impound accounts make it easier to budget for future expenses. Tax and insurance payments are automatically added to your mortgage payment’s monthly interest and principal, and typically remain static outside of occasional annual changes.
Disadvantages Of Impound Accounts
- Homeowners insurance premiums can increase over time. This can lead to an unexpected shortage in payments, requiring you to come up with cash at an unexpected later date to cover any shortfalls.
- Establishing an impound account can require a large upfront payment. That means having to have enough funding on-hand to cover down payments, closing costs and other expenses.
- Impound accounts can be difficult to remove later on. Once established, it’s not simple or always allowed to shut down the escrow or impound account and alleviate yourself from related responsibilities under it.
The Bottom Line
Maintained by your mortgage lender, your impound or escrow account will be added to as you pay your monthly bills. These payments will later be disbursed at a later date to cover expenses like property tax and homeowners insurance.
Given that you’re required to pay various tax- and home-related expenses beyond your mortgage even if you don’t have an impound account, many homeowners elect to keep these accounts in place thanks to the convenience that they provide.
That said, if you’re wondering how to factor their presence into your monthly budget planning, and the reasons behind various property-related expenses, read up on the other components of mortgage payments.