You may have heard of “impound accounts” and have questions about how they work. Many first-time homebuyers are surprised by the amount of money they must bring to escrow at closing. This can be directly tied to impound accounts. We’ve outlined impound accounts and answered some of the most common questions.
What Is An Impound Account
Impound or escrow accounts are maintained by lenders or servicers and are set up to allow you to pay your property taxes and hazard insurance on a pro-rata monthly basis instead of on a semi-annual or annual basis.
When Do You Need An Impound Account?
When a down payment is less than 20%, lenders can require an impound account. However, most borrowers choose to have an account even when it’s not required This is for the convenience of making one payment monthly instead of setting aside cash for taxes and insurance.
Funding Your Impound Account
You create the impound account by making an initial deposit. This is referred to as “funding the impound account.” The amount needed to fund the account will vary depending on when you close escrow.
Property taxes are paid twice a year, typically in spring and fall. Each installment pays one-half of the total tax bill. The impound account needs to carry enough funds so that there is a two-month buffer remaining when it reaches its lowest balance.
How Are Impound Payments Calculated?
Mortgage lenders calculate impound payments for homebuyers. This is typically calculated as a monthly payment that consists of annual property taxes and annual insurance fees. A general rule of thumb for this calculation is to multiply the purchase price of the home by 1.25% – however this may vary depending on the individual borrower’s finances. To find out what your impound payments will be, call your mortgage lender for more information!
Homeowner’s Insurance And Impound Accounts
A portion of your homeowner’s insurance premium will also need to be deposited into your impound account. Depending on the renewal date of your policy, the exact amount will vary. You can typically subtract the months remaining before your policy is up for renewal from 14 months to get the amount.
Getting A Refund
If you are refinancing and you had an impound account for your old loan, you more than likely will still need to set up a new account. You will receive the balance from your old account approximately two weeks after paying off your old loan. If you take a look at your current mortgage statement, it may tell you the balance in your impound account. If it doesn’t, you can call the number on the statement from your loan servicer to find out.
The initial deposit will appear on your closing costs statement. For a refinance loan, it may be possible to add this amount to your new loan balance to avoid bringing cash to close.
California Impound Account Laws
California has many laws that protect homebuyers and limit lenders from requiring escrow and impound accounts. To learn more about the California’s laws regarding impound accounts, escrow accounts, and lender restrictions, review this informative article here.
Questions? Contact Us!
To learn more about impound accounts, or how you can get pre-approved, secure a low mortgage rate, and the other factors that impact your home loan process, you can contact our expert team of Mortgage Analysts. Our team is available 7 days a week by phone at (855) 855-4491 or by email at [email protected].