Impound Accounts
When you take out a new mortgage, you will start paying monthly principal and interest on a loan. Homeowners are also required to pay property tax, and homeowners’ insurance. These payments are not a part of the mortgage, but the bank wants to ensure the homeowner will not default on either one in order to minimize the risk of having the property seized by the state and losing their investment. New home buyers who put less than 20% towards a down payment are oftentimes seen as riskier borrowers with less stake in their property. For this reason, the lender will want assurance that the homeowner can afford to pay property tax and homeowners insurance and might require an impound account. An impound account, also known as an escrow account, is setup to collect the homeowner’s property taxes, home insurance, and PMI (if required). This account is managed and held by the mortgage company. When the homeowner has invested enough equity in the home, the mortgage company is often willing to remove the impound account requirement.
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How an Impound Account Works
The mortgage company will calculate your annual property tax and homeowner’s insurance premium. Then they will divide the total amount due annually by 12 to determine your monthly escrow payment. For example, if your annual property tax is $1,200 and your annual homeowners’ insurance is $600, you will need to pay $150 a month into your escrow account.
It is important to understand that your monthly mortgage payments can change when the impound account adjusts. If your property tax or homeowner’s insurance increases or decreases in a six-month period, your impound account and mortgage payments will reflect the changes. If you decide to sell your house or refinance your mortgage loan, the mortgage company will review the amount of money you have leftover in your escrow account and issue you a cash refund.
Benefits of an Impound Account
Although it might feel frustrating to see your monthly payments increase with the addition of an impound account, it is important to remember that the money you are paying towards escrow is money that you would owe at some point within the year. An impound account acts like a savings account. Instead of facing one large property tax payment every six months, you are saving a smaller portion of the amount due each month. The same is true for insurance payments. Some financial advisors will suggest that a homeowner open an escrow account, even if the mortgage company does not require it.
