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While sometimes mandated by a lender depending on the type of loan, impound accounts (sometimes called “escrow accounts”) are an elective account that serve as a placeholder for property tax and insurance bill payments. Below are some pros and cons to these accounts....
To setup this account, a lender simply divides the annual cost of property taxes and homeowner’s insurance into a monthly amount, and adds it to the mortgage payment.
The lender then takes the taxes and insurance portion of a regular mortgage payment and sets it aside into this separate impound account, ensuring enough money is available to pay taxes and insurance when they’re due.
So should you choose to have an impound account?
Forced budgeting - ensures you don’t get behind on taxes and insurance, since you’re required to pay them on a monthly basis.
Streamlined payments - the lender does the calculations for you when property tax & insurance bills come in. You just pay the resulting monthly portion and don’t have to worry about getting hit with the big bill once or twice a year.
In the past borrowers didn’t like the idea of giving money to lenders in advance without earning interest. But these days, lenders are required (in most states) to pay you interest on impound account balances.
“Captive” money - during a refinance, you’ll often have to fork up your own money to pre-fund a new impound account, since the money in your old lender’s account isn’t refunded to you until 2-3 weeks after your new loan is completed.
Relying on the lender - sometimes lenders fail to make payments due to internal errors, or not receiving a supplemental tax bill. This can create problems for borrowers such as late fees, etc.
In the end, most borrowers have the choice on whether to have an impound account with their lender. If you have questions on whether this is best for you, don’t hesitate to contact us...we’re happy to help!