Impound accounts

What is an Impound Account?

An impound account, also known as an escrow account, is a separate account managed by your loan servicer. Its purpose is to collect and hold funds for two critical expenses associated with homeownership: property taxes and homeowners insurance. Every month, a portion of your mortgage payment goes toward these costs, alongside your principal and interest. When it’s time to pay property taxes or insurance premiums, your loan servicer uses the funds from this account to cover the bills on your behalf.

Benefits of an Impound Account

Using an impound account provides peace of mind. You don’t have to worry about missing property tax or insurance payments or keep track of due dates. By managing these payments on your behalf, your loan servicer ensures that your property taxes and insurance are paid on time – a big relief for many homeowners.

What About Supplemental Tax Bills?

One thing to keep in mind is the supplemental tax bill that new homeowners often receive within the first year. When you purchase a home, the county assessor calculates taxes based on the purchase price, which usually differs from the previous owner’s tax amount. This difference results in a supplemental tax bill that you’ll be responsible for paying. Keep an eye on your mail or check with your county assessor to see if this bill has been issued.

Why Do Lenders Require an Impound Account?

In many cases, lenders require an impound account as a form of risk mitigation. By ensuring that property taxes and insurance are paid on time, the lender reduces the risk of liens being placed on the property or lapses in insurance coverage. Essentially, it’s a measure that protects both the lender’s and the homeowner’s interests.

The Importance of Escrow Analysis

One crucial aspect of impound accounts that every homeowner should understand is the escrow analysis process. Loan servicers conduct an escrow analysis at least once a year to verify that the right amount is being collected monthly. This process considers changes in property taxes and insurance premiums, ensuring that your monthly payment will cover upcoming expenses.

Potential Issues with Escrow Analysis

Unfortunately, loan servicers don’t always get this analysis right. It’s not uncommon for servicers to under-collect or over-collect for property taxes and insurance, leading to significant adjustments in your monthly payment. If there’s an under-collection, you may face one of two options: either pay a lump sum to cover the deficit or accept a temporarily increased monthly payment until the balance is restored.

How to Protect Yourself

To avoid surprises, take an active role in understanding your impound account. Here are a few simple steps you can take:

Check Your Annual Insurance Premium: Contact your insurance provider to confirm the annual premium on your homeowner's insurance.
Verify Your Property Tax Amount: Go to your county assessor’s website to check the total annual property taxes for your property.
Calculate Your Monthly Collection Target: Divide your combined annual property tax and insurance costs by 12. This should be roughly the amount your loan servicer collects each month. If your monthly payment is significantly different, reach out to your loan servicer to adjust it.

Conclusion: The Role of an Impound Account in Your Mortgage

An impound account is a convenient way to manage your property taxes and insurance payments, ensuring that these critical expenses are covered on time. However, it’s essential to stay informed, understand how much should be collected, and monitor your escrow balance through annual analysis. By staying on top of your impound account, you can avoid unexpected costs and maintain control over your home expenses.

FAQs

1. Do I have to use an impound account for my mortgage?

In many cases, lenders require an impound account to ensure that property taxes and insurance are paid on time. However, some loan types and certain borrowers may have the option to waive this requirement.

2. What is a supplemental tax bill, and why am I responsible for it?

The supplemental tax bill reflects the difference in property valuation between the previous owner’s assessed value and your purchase price. It’s a one-time adjustment that new homeowners are typically responsible for covering.

3. How often should I check my escrow balance?

It’s a good practice to check annually, especially after the loan servicer completes an escrow analysis, or if you notice a change in your property tax or insurance rates.

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