Understanding Mortgage Impound Accounts

Buying a home is often the greatest expense any borrower will ever incur. Therefore, it is important that you protect and maintain this investment. Among other things, that means always paying your homeowner's insurance and property taxes on time, every time. But with so many other costs to monitor, it may be difficult to budget appropriately for these hefty expenses. Fortunately, there is an alternative for homeowners wishing to lessen the burden of remembering and meeting those insurance and tax bills. This option is known as an impound or escrow account.

Mortgage Impound Accounts: A Quick Definition

A mortgage impound account is a fund which houses monies for future insurance and tax payments. Homeowners will make incremental deposits to the account in addition to their monthly mortgage payments of principal and interest. Then, when it comes time for the yearly homeowner's insurance or property tax payment, money will automatically be withdrawn from the fund. This ensures that your insurance and tax bills will be made on time and in full. Best of all, you won't have to worry about paying off these big ticket items in one lump sum.

Your Initial Impound Payment: Planting the Seed

When you first establish an impound account, a deposit of between two to eight months' worth of property taxes and insurance payments are placed into the fund, as set forth in the Real Estate Settlement Procedures Act or RESPA. This initial sum is known as the impound deposit or seed payment. The initial amount can include up to a two months cushion. This financial padding is to ensure there are sufficient monies available as the taxes and insurance are due.

Once you've made your first deposit, you will then begin making regular monthly payments to your impound account. To determine how much money should be collected each month, a homeowner's estimated annual insurance and property taxes is simply divided by 12 months. That amount is then added on top of the borrower's monthly principle and interest amounts. Simply put, you'll be putting money into your impound account along with every mortgage payment.

The Annual Impound Statement

To help borrowers keep track of their impound account's health, RESPA requires lenders to provide annual impound statements. This document will summarize and detail each impound deposit and payment made throughout the year. The statement will also alert the borrower to any fund deficits or surpluses. Keep in mind, however, that if your taxes and insurance increase and your loan servicer collected too little, you will remain responsible for that lapse in insurance or property tax payment. Likewise, if your lender has over-estimated the amount required and collecteds too much, they are required by law to make you a refund.

Some Considerations

Before you choose to open an impound account, there are a few details you should consider.

  • You will typically not accrue any interest with an mortgage impound account (though interest is required in some states). This means what you put into the fund is what you'll get out of the fund.
  • Although most lenders have systems in place to ensure your insurance and tax bills are paid on time, like any other process, there is potential for error. Payments may fall through the cracks. Therefore, be certain to continually check on the status of your impound account. Make sure there are enough funds in place and the correct dates of payment have been submitted.
  • Cancelling an impound account can be difficult. While you can always petition to have the fund closed, loan programs, such as FHA, typically only allow this option for borrowers who have achieved 20% or more equity in their homes or have chosen to refinance their properties.

Final thoughts

Preparing to budget for your yearly insurance and tax payments can be a hassle. But with an mortgage impound account, you have the ability to put a little away each month so you don't have to pay off these expenses all at once. Just remember to continually monitor your account. Make sure there are enough funds available and the correct payment dates are logged. Most importantly, never hesitate to contact your lender if you have any questions about fluctuations in impound amounts. Remember, you are always entitled to an analysis that details how your impound money is being disbursed.