Understanding the Role of Mortgage Impound Accounts
07/19/2017 Kristin Demshki
When most mortgage borrowers sit down to crunch the numbers, they often focus on how much money is needed for a down payment, the home purchase price, and the estimated costs of their monthly principal and interest payment. Yet, many people overlook the costs of their escrow impound account.
By now, you’ve likely heard the term “escrow” more than a few times throughout your home buying experience. However, the role of a mortgage escrow impound account is very different than the real estate escrow account used by buyers and sellers when closing on a new home.
So what is a mortgage escrow impound account? And how does it affect your monthly mortgage payment?
What is a Mortgage Escrow Impound Account?
A mortgage impound account—also known as an escrow impound account—is a financial account set up by a lender or loan servicer to collect the expenses of property taxes, homeowners insurance and mortgage insurance (if applicable). Borrowers make monthly payments into the impound account that amount to 1/12 of their total annual tax and insurance premium costs. Your lender then uses the funds collected in your impound account to pay those bills on your behalf.
For example, if your property taxes and insurance add up to $5,000 a year, you’ll need to add approximately $417 to your mortgage payment, though these costs may fluctuate from year-to-year, particularly as tax rates change.
A mortgage impound account is similar to a savings account, but one that’s dedicated to tax and insurance. Instead of paying a large lump sum on an annual or semi-annual basis, these fees are automatically consolidated into your monthly mortgage payment so you don’t even have to think about it.
Who Is an Impound Account For?
Borrowers who obtain a mortgage through the Federal Housing Administration (FHA), most loans administered through the Department of Veterans Affairs (VA), and homeowners who have put down less than 20% (10% in California) are typically all required to have a mortgage impound account.
Can I Opt Out of Mortgage Impound?
Generally, when you take out a conventional loan your mortgage lender will require an escrow account if you borrow more than 80% of the value of the property. This means that if you make a down payment of 20% or more, or have 20% equity, your lender probably will waive the escrow requirement if you request it.
If you have a FHA loan, you must have an escrow account. The FHA requires that lenders making FHA-insured loans establish escrow accounts for those loans.
The VA does not require lenders to maintain escrow accounts on VA-guaranteed home mortgages. However, the VA does require that lenders ensure that the property is covered by sufficient hazard insurance at all times and that property taxes are paid. So, most lenders use escrow accounts to ensure compliance with this requirement.
Borrowers can talk to a licensed PennyMac Loan Officer for additional information.
Why Is a Mortgage Impound Account Necessary?
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.
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.
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.
How Monthly Mortgage Impound Works
Your lender will establish your escrow impound account at closing. You’ll be required to submit an initial deposit, which includes a portion of the costs of your insurance and property taxes. In fact, your lender may require you to pay as much as the first year of homeowners insurance, and up to two months of impound tax payments.
After your initial deposit, you’ll be required to make these payments every month along with your monthly mortgage bill. Once the money is received, your lender will set aside the funds in your escrow impound account until they are due to your local municipality or insurance provider.
It’s important to note that under the rules of HUD (the US Department of Housing and Urban Development), your lender can only hold up to two months of payments, and should not ask you for extra payments as “cushion” beyond that limit.
Tracking Your Monthly Impound Payments
While your lender may handle your mortgage impound account, paying your homeowners insurance premiums and property taxes on time is ultimately your responsibility—and it’s important to take the time to review that everything is in order.
The government requires your lender to supply you with an annual statement, which serves as a record of all your impound escrow payments and transactions. This statement also reveals any shortages or overages, due to standard adjustments. That’s why some lenders require you to keep a minimum balance (limited to 2 months) in your escrow impound account.
Depending on these fluctuations, you may have to make up for any shortfalls with a one-time payment—or you may be entitled to a refund.
Canceling a Mortgage Impound Account
There are times when a lender allows borrowers to cancel their impound accounts altogether. In these cases, homeowners typically need to meet specific qualifications, such as having at least 20% in home equity and having made all of their payments on time for at least one year.
You may be wondering why some people would want to cancel their impound account. Some saving-savvy homeowners like to be able to control where their savings are placed—for example, into an account that earns back interest. Others simply prefer to make payments in a one-time lump sum.
If you plan to cancel, you’ll first need to talk to your lender to see if it’s allowed under your mortgage agreement. As mentioned before, you may be required to carry a mortgage impound in escrow until your loan is paid in full.
An Essential Part of the Mortgage Process
Mortgage impound accounts were designed to make mortgage payments easier to manage. By understanding the purpose of these escrowed accounts—as well as how they serve to protect borrowers—it’s clear why many lenders include these requirements into their mortgage agreements.