Impound Accounts when Buying or Refinancing a Home
When you buy a home and secure the purchase with a mortgage,
not only will you be required to pay the monthly loan payments, you will be making a commitment, for as long as you own the property, to pay the property taxes every year as well as maintaining a homeowners insurance policy. And depending on the amount of down payment, you might be required to pay for private mortgage insurance. On home loans with less than 20% down, impound accounts are typically mandatory. Money to make these payments is kept by the lender or third party in an impound account.
So what exactly is an impound or escrow account?
An impound is an account is where your monthly deposits are made and then paid out as needed by the lender to cover the taxes and insurance at the proper time. This method will allow you to make level monthly contributions rather than making one or two large payments when they are due. This will really help your monthly budgeting process as these large payments always seem to occur when you can least afford it.
Because these holding accounts relieve the burden of coming up with a larger payment, they also turn over control of your funds to a lender or third party. Some, but not all, states require that interest be paid on an impound account. You can, of course, maintain your own savings account to handle these costs but the interest you could earn is currently not very high and the penalty for missing one of these payments would wipe out any investment value of doing it yourself.
The amount needed at the time of home purchase might be 3-8 months for taxes (depending on when taxes are collected) and 12-14 months of insurance premiums. This is money will have to be paid upfront when you close the transaction in addition to your down payment and closing costs.
So who benefits from these impounds?
Obviously, the lender will want these in place to assure that you are contributing to the taxes and insurance so you don’t lose your house to a tax lien or unpaid insurance. But you as the homeowner also benefit because it levels out your expenses throughout the year and puts those payments on autopilot.