Impound accounts explained: Why your lender holds funds

Figuring out where all of your money will go when you buy a home can be confusing, especially when you’re told your funds will be held in an impound account.

Impound accounts go by different names depending on where you live, and the lender sets them up to cover property-related expenses. Many mortgage services require you to pay taxes and insurance through an impound account.

This article covers why your lender is holding funds, how impound accounts work and whether they’re required before you can close on your home.

What is an impound account?

An impound account holds your funds to pay for real estate expenses outside of a mortgage, such as property taxes and homeowners 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 there’s a shortage, you’ll be responsible for paying the difference.

Impound account vs. escrow account

Some confusion on this topic can arise because impound accounts can go by different names. Impound accounts are also known as escrow accounts in most areas.

Are impound accounts mandatory?

The type of loan product you choose influences whether you’ll need an impound account. Some loans backed by the government, such as Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA), must have an impound account.

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

When are impound accounts not required?

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’ll still be personally responsible for making your insurance and tax payments on time.

What are the pros and cons of impound accounts in real estate?

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. But beware of getting complacent with your insurance rates – it’s easy to lose track of them since they’re automatic.

The pros

Some advantages of impounding your property expenses are:

• You could get a discount. You may be eligible for a discount on interest rates 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 automatically set. The monthly amount you’ll 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 your impound disclosure statement every year to see if there are any changes.
• There are no large annual payments. 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.

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.
• Your estimate could be incorrect. When your lender sets aside money in an impound account for your property taxes and homeowners insurance, there’s always a possibility that they could be withholding too much or too little to cover the costs of these expenses.
• Your monthly payment could change each year. If you end up with a shortage in your impound account, your monthly mortgage payments may increase to cover the difference. If you end up with a surplus, your payment could potentially decrease so that you’re not paying more than necessary.

Do i need to do anything to manage my impound account?

You don’t need to do much to manage your impound account, and your mortgage lender will handle 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.

What should i do if i run out of funds in my impound account?

You're probably wondering how it could even be possible to run out of funds in your impound account. It all comes down to varying costs: 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 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 there's enough money in the account again. Some lenders let you set an autopay agreement with them so that all payments will already automatically withdraw from your bank account on the due date.

Usually, the lender will initiate the repayment method or options available to you after analyzing  your impound account. You can also search for less-expensive insurance providers. This can lower the annual cost of your insurance and reduce the overall amount needed in your impound account.

The bottom line: Expect insurance and taxes with or without an impound account

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

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

Considering getting a mortgage and looking for more information about how it all works? Learn how Rocket Mortgage^®? simplifies the escrow process and makes it easier for you to stay on top of your finances.