Impounds

Most lenders allow the payment of property taxes and homeowner’s insurance
each month with the mortgage payment.

An impound account is a strictly regulated, interest-bearing account set up by your lender to pay property taxes and homeowner’s insurance on your behalf. Each month with your mortgage payment you pay an amount equal to one-twelfth of your annual property taxes and homeowner’s insurance, which your lender will deposit into your impound account. The lender will then pay the insurance premium annually, and the property taxes semi-annually. At closing you will fund this escrow account by paying into it two months of homeowner’s insurance premium. You will also pay from two to five months of property taxes, depending on when during the fiscal year you are closing. The lender is required to send an escrow account statement to you each month, either in addition to, or combined with, your monthly mortgage statement.

ADVANTAGES DISADVANTAGES
  • Ease of budgeting
  • Better loan terms
  • Higher closing costs
  • Borrower doesn’t control tax and insurance payments

 

Having an impound account takes away the potential financial stress of having to make large tax and insurance payments. Property taxes are due at inconvenient times: in December just before the Christmas holiday, and in March just before tax time. If budgeting for large expenses is a challenge for you, having an impound account can be very helpful. It also means two less things to worry about in an already crowded life.

Another potential advantage to having an impound account is that certain loan programs provide a credit when a borrower agrees to the impounds. This credit most commonly is .15% of the loan amount; on a $500,000 loan that would mean a credit back to the borrower of $750.

Here is an example of how impounds work for someone with a monthly mortgage payment of $2500, annual property taxes of $6,000, and annual homeowner’s insurance of $1200. Rather than writing a $2500 check each month for the mortgage, and then paying a tax installment of $3000 in December and again in March, and a homeowner’s insurance bill of $1200 once during the year, you pay one payment of $3100 each month, and the taxes and insurance are covered. The $6000 property taxes are $500 per month, and the $1200 insurance payment is $100 per month, and those are added to the $2500 mortgage payment.

At the time you go into contract, or lock in your rate on a refinance, if you opt for impounds your lender will be able to tell you exactly how much you will have to pay into the escrow account at closing. On the Good Faith Estimate these items are listed under the category ‘Initial Deposit for Escrow Account’.