Understanding Mortgage Impound Account
Impound is an account maintained by mortgage companies to collect amounts such as hazard insurance, property taxes, private mortgage insurance, and other required payments from the mortgage holders. These payments are necessary to keep the home but are not technically part of the mortgage.
An impound account (also called an escrow account, depending on where you live) is simply an account maintained by the mortgage company to collect insurance and tax payments that are necessary for you to keep your home, but are not technically part of the mortgage.
Impound accounts lower risk for mortgage lenders, because they reduce the chance that your property will be confiscated for unpaid taxes, or that it will be destroyed and uninsured. Impound accounts hold funds to pay your property taxes, homeowners insurance, and perhaps other accounts like flood insurance or HOA dues.
In California, impounds are only required if the loan-to-value ratio (LTV) is 90% or higher. But you may still have to pay to waive escrows either way. But if you have a conventional loan and you currently have impound accounts, it’s possible to cancel those accounts as long as you currently have at least 20 percent equity in the property.
Cancelling typically means a formal request from the loan servicer who will proceed with closing out the accounts.
What is an escrow or impound account?
An escrow account, sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses.
The money that goes into the account comes from a portion of your monthly mortgage payment. An escrow account helps you pay these expenses because you send money through your lender or servicer, every month, instead of having to pay a big bill once or twice a year.
Many lenders require that you pay your taxes and insurance using escrow, so they can make sure that the bill gets paid. Your mortgage servicer will manage the escrow account and pay these bills on your behalf. Sometimes, escrow accounts may also be required by law.
Your property taxes and insurance premiums can change from year to year. Your escrow payment—and with it, your total monthly payment will change accordingly.
Tip: If your loan doesn’t include an escrow account, you will have to plan to pay these large expenses yourself. Be sure you budget for these extra costs and stay current on your taxes and insurance payments. If you fail to pay your property taxes, your state or local government may impose fines and penalties or place a tax lien on your home. You could also face foreclosure.
In addition, if you fail to pay your taxes or insurance, your lender may:
- Add the amounts to your loan balance
- Add an escrow account to your loan
- Purchase new homeowners insurance for you and bill you for it. This lender-purchased insurance, known as force-placed insurance, is typically more expensive than homeowners insurance you pay on your own.
Even if your lender does not require an escrow account, consider requesting one voluntarily. An escrow account makes it easier to budget for your large property-related bills by paying small amounts with each mortgage payment. That way you don’t have to scramble to pay a large property tax bill or insurance premium when it comes due.
2 Quick Tips About Mortgage Impound Accounts
Mortgage Impound Account Payments: The purpose of a mortgage impound account is to have you pay the lender each month:
- Your regular loan payment
- Income taxes
- Hazard insurance
The first charge is a lender charge. The other two charges are third-party charges that you must pay periodically or annually. Instead of waiting around to pay these amounts, the lender collects this from you monthly.
Mortgage Impound Account Purpose
The lenders collect this money and pay it on your behalf, in theory. In practice sometimes they are late with this, so you need to keep on top of this.
Lenders often give a borrower a discount on their interest rate if they agree to pay their additional expenses such as taxes and insurance on a monthly basis.
The purpose of this is to make sure you don’t get behind on paying these other charges.
Some lenders can require that you do this every month. This is usually if the size of your loan is over 90% of the value of your property. This can vary from lender to lender and state to state.
When comparing offers from lenders you can check to see if the rate reflects these impound accounts and the discount that goes with it.
It is also important to know what your total monthly payment will be after you get your new mortgage loan. If it includes impounds this can end up being several hundred dollars more per month extra.
Having Homeowners Insurance Billed Through Impound Account in 2021
Many home loans require that the borrower maintain an impound account that is associated with the loan. In most cases, this account is used to renew the homeowner’s insurance associated with the property.
These payments for the new business and renewal homeowner’s insurance policies are mailed out directly from the insurance department that manages the account. Often times the homeowner does not need to verify the amount paid or coverage on the insurance.
With these payments being made without any effort by the insured, many homeowners are left with possible exposure regarding the coverage listed on the insurance policy.
In addition, the insured will often be paying significantly more due to not checking the limits and premium on the policy. If the homeowner were to request quotes for the policies they would oftentimes find that they can find a more comprehensive package at a competitive rate.
The consumer should often check the coverage that is listed on their homeowner’s insurance policy. The dwelling coverage should be based upon the current rebuild cost of the home.
Over time rebuild cost will change with inflation, availability of materials, and other economic factors. If these policies were to continue to renew for an extended period of time without any adjustments made to them it is possible that the homeowner could be significantly underinsured.
Mortgage Impound vs. Paying Taxes and Insurance Yourself
Many homeowners are reluctant to change homeowners insurance companies when the policy is billed to the impound account. They often assume that it would be a challenge to change companies.
This is not the case. If a homeowner were to change insurance companies and wanted the new homeowner’s insurance company to bill the lender directly it will often only take a single phone call from the insured to the lender to authorize the change in insurance companies.
Homeowners should not hesitate t shop for their home insurance simply because the payment is being made automatically.
Should you avoid impound accounts?
Should you avoid an escrow account when you negotiate a new mortgage? Or dump an existing one, once you’re able? It depends on why you want to.
If you are worried about your lost interest, resent being treated like a financial child and have zero money worries, it may be a legitimate choice. But be ready for an additional administrative burden.
You’ll not only have to take on budgeting for and paying those bills, but you’ll also likely have to prove to your lender you’ve done so. And you may have to pay an escrow waiver fee on closing or cancellation.
Many people enjoy being free of administrative burdens and are glad to have their escrows. If you’re not one of those people, the time to deal with them is when shopping for your home loan.
Pros and cons of an impound account
Impound accounts are sometimes referred to as “escrow” accounts and refer to the funds that are held on the borrower’s behalf as a part of the lender’s service.
A borrower is said to have an impound account when the monthly mortgage payment includes property taxes and/or monthly homeowner’s insurance premiums.
The term impound comes from the fact that when a borrower has an impound account, the lender requires the borrower to pay some money into this account in advance, thus ‘impounding’ the money.
With each monthly mortgage payment, the borrower will include 8.3 percent of the annual property taxes and 8.3 percent of the annual insurance premium.
While this monthly addition to the principal and interest payment will obviously increase the borrowers’ monthly obligation, there will be no shock to the borrower’s budget when the property tax bill and insurance bills come due.
Because half of the property tax bill is due Nov. 1; the other half is due Feb. 1, the borrower who has an impound account will be spared from scrambling to come up with the cash to make those lump sum payments to the county.
For a house purchased in Santa Cruz County at December’s median price of $919,500, the semi-annual tax bill will be greater than $5,000.
The exact amount is dependent on the sales price as well as the assessments for that neighborhood. The homeowner’s insurance premium is typically due once per year and can be $1,000 or more.
Impound account pros and cons
Many borrowers choose to set up an impound account with their lender at the time the loan is originated; however, lenders are always happy to set up an impound account at any time after buying or refinancing the home
The benefits are obvious: budgeting is automatic and there is no choice but to set money aside each month for the inevitable property tax and insurance payments.
Actually, homeowners’ insurance, which protects the homeowner from such hazards as fire, theft, liability, etc., is required by lenders but is not required if there is no mortgage on the property.
As insurance helps protect a person’s most valuable asset, I am always amazed to hear of some fire or flood that financially wipes out a family because they had no insurance or because it had lapsed.
All FHA loans require an impound account and most all lenders who loan more than 90 percent of the value of a home will require an impound account.
The biggest downside to an impound account is having to pay a chunk of property taxes in advance. Depending on the time of year the escrow closes, up to eight months of property taxes may be due at the time escrow closes.
Eight months of property taxes can add $6,600 or more (in the above example) to the cash required at closing by the borrower.
This injection into the impound account will provide the lender with slightly more than enough cash to make the required property tax payments to the County because lenders require an extra two months of property taxes in the borrower’s impound account as a buffer to cover future increases.
Proposition 13 protects the home’s property tax base but property taxes are still allowed toincrease at the rate of 2 percent per year.
Borrowers who have the choice and choose to not set up an impound account benefit by being in charge and in control of their own funds. It takes discipline to set aside these funds but those who are savers may wish to keep their money where they can have access to it.
Unpaid impound dues mortgage
Sometimes, lenders or loan servicers collect your impounds but fail to pay your taxes or insurance. This may be more likely if your loan is sold to another lender and the impound account doesn’t transfer seamlessly.
The lender must make the insurance and tax payments on time as long as your mortgage payment is not more than 30 days past due. If there aren’t enough funds in your escrow account to cover the payments, that’s not your problem. The lender’s job is to manage your escrows, and by law, it must advance funds to pay your accounts.
If the insurance or property tax has not been paid on time, notify your lender in writing. It must confirm receipt of the notice of an error within five business days, correct the error within 30 business days and eat the cost of any late charges or penalties.
What happens if you mess up?
If you choose to avoid escrow accounts, what happens if you get into arrears with your taxes or insurance? Typically, your lender will step in, pay the outstanding amount and add it to your mortgage balance.
But it’s also likely to declare you in breach of your waiver and impose a new escrow account on you. If your arrears are for insurance, it can also require a “force-placed” policy, which is usually much more expensive than alternatives you find yourself.
An impound account (also called an escrow account, depending on where you live) is simply an account maintained by the mortgage company to collect insurance and tax payments that are necessary for you to keep your home but are not technically part of the mortgage.
An escrow account sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses. … Your property taxes and insurance premiums can change from year to year.
Can you dump your existing impound account?
Providing you don’t have an FHA, VA, or USDA loan, you can ask your lender to cancel your escrow account once your LTV dips below 80 percent. That’s only a rough guide because each company can set its own threshold.
Whatever sort of loan you have, the lender can refuse your request, and insist that your escrow account remain operational. Or, it may allow you to cancel your impounds but charge you a fee for doing so.