What is an impound account?
An impound account, also known as an escrow account, is an account set up by a lender to pay the borrower’s property related expenses. The borrower funds the account each month as a part of his regular mortgage payment. When the payments come due, the lender pays the bills on your behalf.
When you purchase a home, you can expect reoccurring costs other than the principle and interest on your mortgage.
. You’ll also pay:
- Homeowner’s insurance.
- Property taxes.
- Additional insurance policies required in your area (such as flood insurance).
To minimize its risk, the lender may require that homeowners, especially those with less than a 20 percent down payment, pay these expenses using an impound account.
An impound account guarantees that money is set aside for property taxes, preventing the state from seizing the property for non-payment of taxes. It also assures the lender that the home has adequate insurance in case of a natural disaster.
Some homeowners prefer to use an impound account to budget for these expenses. Once you have 20 percent equity in your home, you usually have the option to cancel your impound account.
Your insurance premiums and taxes vary each year. Expect your lender to reassess your account annually; depending on your balance and new expenses, you may receive a refund or have to pay extra to cover any shortages.
Impound account example
If you decide to purchase a home with a down payment that is less than 20 percent of the purchasing price, you’ll likely have to use an impound account.
For example, assume that you buy a new home for $200,000 with a 10 percent down payment. Your annual real estate taxes are $2,000 a year, and your insurance premium is $1,200, totaling additional annual expenses of $3,200.
To see that you have enough in the account, expect your payment to include approximately $266.67 to cover your insurance and taxes.
Is it time for your impound payment to adjust? See how this affects your monthly mortgage payments.