Impound or escrow accounts are maintained by lenders or servicers and are set up to allow buyers to pay their property taxes and hazard insurance on a pro-rata monthly basis instead of on a semi-annual or annual basis.
For example, if property taxes are $6,000 per year, and hazard insurance is $1,000 per year, a buyer would have a total of $7,000 to divide into twelve monthly payments of $583 per month.
Buyers would simply add the $583 to their principal and interest payment and make the larger payment to their lender or servicer each month. The lender/servicer will then make property tax and hazard insurance payments on behalf of the buyers.
WHEN IMPOUNDS ARE REQUIRED
In California, impound accounts are usually required when a buyer’s down payment is less than 10% of the purchase price. In Texas, impound accounts are required when the down payment is less than 20%. Impound accounts are, however, always required for FHA and VA loans.
Many of our conservative borrowers like the security, safety and forced savings that an impound account imparts. They also like not having to worry about coming up with the necessary funds to make the large property tax and insurance payments when they come due.
Despite this, we often recommend that borrowers do not set up an impound account, when allowed.
This is because impound accounts often require substantially more cash at close of escrow (that borrowers sometimes do not have or that borrowers need for required “reserves” after close).
In addition, we like to remind buyers that lenders and servicers usually do not pay interest against impound account balances.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646