Impound Accounts Explained: Why Your Lender Holds Funds

Figuring out where all of your money will go when you are purchasing a home can be confusing. Especially when you are being told your funds will be held in an impound account.

But here's the thing:

Impound accounts go by different names depending on where you live, and the lender sets them up to cover property-related expenses.

Many mortgage servicers require you to pay taxes and insurance through an impound account for your bill to be paid.

This post will cover why your lender is holding funds, how impound accounts work, and if they are required before you can close on your home.

An impound account holds your funds to pay for real estate expenses outside of a mortgage, such as property taxes and insurance.

It isn’t an account you have to worry about managing yourself because your lender controls it.

However, this doesn’t mean you can ignore this account because there is a possibility you could end up with a shortage if your insurance premiums or taxes increase.

If a shortage happens, you will be responsible for paying the difference. Impound accounts are also known as escrow accounts in most areas.

The requirement of an impound account will be determined primarily by the type of loan product you choose. Some loans backed by the government (such as FHA and USDA) must have an impound account.

Homeowners who purchase a home with a conventional mortgage with less than a 20% down payment need to have an impound account for their mortgage payments, but those requirements vary depending on location.

If you have a strong credit score and your loan-to-value ratio is 80% or lower, there is a possibility that you could have your impound account waived.

However, you will still personally be responsible for making your insurance and tax payments on time.

The main advantage of using an impound account is that it minimizes the risk of missing property payments due to unforeseen expenses like medical bills, car repairs, etc. However, a notable disadvantage is getting complacent with your insurance rates since the payments are automatic.

The Pros

Some advantages of impounding your property expenses are:

You could get a discount: You may be eligible for a discount on their interest rate or closing costs by electing to have an escrow account.

Your lender is responsible for making the payments: Your lender will automatically make your homeowners insurance and property tax payments on time.

Your monthly rate is pretty much set: The monthly amount you will need for your taxes and insurance is automatically added to the monthly principal and interest mortgage payment (typically PITI, which stands for principal, interest, taxes, insurance) and is pretty much set; you should look at these once a year to see if there are any changes.

No large annual payments: Most of us aren't great at saving up for things, especially if a big payment is coming up. Impound accounts make it easier for you to plan and budget for your ownership responsibilities by collecting the money each month, rather than having a single large annual payment that could be difficult to afford on one’s own.

The Cons

It's easy not to review your insurance: Since your payments are coming out automatically, it's easy to forget to check your insurance rates on an annual or semi-annual basis. According to a 2017 study conducted by Hippo Insurance, some 70% of people don't do any research before buying home insurance. This means most people probably don't even have the correct coverage for their homes.

There isn’t much you need to do regarding managing your account, and your mortgage lender will be handling your impound account for you.

Your mortgage statement will probably show the balance in your impound account, making it easy for you to keep track of it.

Federal regulations also help borrowers out by requiring lenders to review borrowers' impound accounts annually to ensure that the correct amount of money is being collected.

If too little money is collected, the lender will ask for more; if too much is in your account, you'll get an escrow refund.

You're probably wondering how it could even be possible to run out of funds in your impound account. However, even with fixed-rate home loans, insurance and property taxes can vary annually.

If your property taxes or insurance vary often, you could end up being short on funds each month.

One option would be to ask that a percentage from each of your payments go toward insurance premiums and property taxes until such time when there's enough money available in the account again.

Some lenders let you set an autopay agreement with them so that all payments will already automatically withdraw from your checking account on the due date.

Usually, the lender will initiate the repayment method or options available to you after analyzing the loan.

You can also search for less expensive insurance providers. By doing this, you can lower the annual cost of your insurance and reduce the overall amount needed in your impound account.

Your impound account is a safe place to store your money until it's needed for property taxes, homeowner’s insurance premiums, and other expenses during the year.

Even if you don’t have an impound account, you are still responsible for paying homeowner’s insurance, property taxes, and other home-related expenses outside of your mortgage.

And guess what:

If you don’t pay your taxes and insurance, the lender can force you into an impound account to protect their investment.

You should expect to pay for insurance and taxes with or without an impound account because they are due regardless of whether you have an impound account or not.

Learn how Rocket Mortgage®️ simplifies the escrow process and makes it easier for you to stay on top of your finances.