10 Jan What is an Escrow Impound Account and How Does it Work?
When it comes to opening escrow on a home, there are a lot of moving parts! A question that we get asked a lot about are impound accounts, so we wanted to take this opportunity to explain them in more detail. If you aren’t sure what an escrow impound account is, read on!
You will hear the terms Escrow Impound Account and Impound Account used interchangeably, so just know that these are the same thing. It is set-up and managed by a mortgage lender to pay property taxes and insurance for a home buyer to ensure that both are paid-in-full and on time.
While many believe that the Impound Account is managed by the escrow company, the impound account is managed by the lender and here is how it affects the closing:
- Upon receipt of loan documents, the lender will include instructions to the settlement agent on amounts to collect at closing.
- The amounts lender requires will appear on the estimate the borrower signs with loan documents.
How Is the Money Collected and Used?
Collecting a monthly amount for items such as insurance and taxes can be helpful for first time home buyers and others because spaces the payments out over time rather than being hit with larger annual or semi-annual bills all at once. Instead, an amount equal to approximately 1/12th of the total sum of the annual property taxes and insurance is collected monthly with your mortgage payment. When the annual property taxes and insurance come due, the payment is made by the lender on your behalf.
How Do I Set-Up an Escrow Impound Account?
In the beginning of the loan shopping process, let your loan originator know if you prefer an impound account for your taxes and/or insurance.
During your approval process, your mortgage lender will review loan pricing options that may require an impound account. Loan to value, credit score, and loan type may all be factors that may determine whether an impound account is necessary. At closing, the lender will instruct the escrow company to collect what is called an Escrow Impound Deposit, and this is generally about 2-6 months of taxes and insurance. This is to ensure that there are enough funds to make the payments in full when they come due.
Think of an escrow impound account as a savings account held in trust by your lender to pay the property tax and insurance bills as they come due.
We know some of these topics can bet pretty confusing, so we hope that you found this information helpful! Of course, if you have any questions about this topic or any other escrow-related topics, please contact us. We are here to help you in whatever way we can.