Impound accounts, referred to as escrow accounts in other parts of the country, are monthly payments made to the loan servicer that go toward paying the annual property taxes and insurance when due.
How do they work?
Each month, along with the principal and interest payment, the borrower also includes an amount that funds an account dedicated to paying property taxes and homeowners insurance as they become due. Instead of paying one lump sum for insurance or paying property taxes biannually, one-twelfth of each annual amount is paid. The loan servicer the entity that collects monthly mortgage payments and manages the loan on behalf of the owner of the mortgage, receives the property tax bill and the insurance bill directly from the taxing authorities and insurance agency.
For example, let’s say a couple has a mortgage and their principal and interest payment is $1,900 per month on a $400,000 mortgage. The annual property taxes for their home, based upon the value of the property, are $4,000 per year. Hazard insurance is another $2,000 per year. Each month, in addition to the $1,900, the couple pays $333 extra for taxes and $170 toward the insurance impound accounts.
When the property tax bill arrives, the servicer pays the bill from the funds paid into the impound account. And in the same fashion the insurance premium is paid.
It’s also not uncommon that after a few years, property taxes go up and there aren’t enough funds in the impound account to pay the entire tax bill. In this instance, the loan servicer makes up the difference and bills the borrower. This shortage is sometimes addressed at the settlement table when the new lender requires an additional month or two of impound payments to establish a cushion just in case taxes are higher than expected. Lenders are restricted from requiring more than two months to establish an impound account at the closing table. Other lenders may require just one and sometimes there are no additional monthly impound accounts collected. These required deposits can vary from one lender to the next.
Impound Accounts Required?
Impound or escrow accounts are required when the first mortgage loan amount is greater than 80 percent of the sales price of the home. This is true of conventional loans as well as the government-backed trio of VA, FHA and USDA mortgages. In this instance, borrowers do not have a choice whether or not to select impound accounts. With conventional mortgage programs where the amount borrowed is less than 80 percent of the home’s value, impound accounts are optional.
When impounds are optioned by the borrowers, most do so for the convenience of paying monthly and having someone else pay the tax and insurance bills when due. Lenders also like borrowers to take out impound accounts to make sure the property is always covered and taxes never become delinquent. Some lenders charge an “impound waiver fee” when borrowers choose not to have impound accounts when they have the choice.
Cancelling Impound Accounts
If you have a government-backed loan you won’t have an option about impound accounts because they’re required. But if you have a conventional loan and you currently have impound accounts, it’s possible to cancel those accounts as long as you currently have at least 20 percent equity in the property. Cancelling typically means a formal request from the loan servicer who will proceed with closing out the accounts.
First however, the lender will make sure the current mortgage balance is at or below 80 percent of the value of the home. Most lenders can request an automated valuation model, or AVM, to obtain a quick look at current property value based upon recent sales of similar homes in the neighborhood.
If there is enough equity, the lender closes out the escrow account and you will be refunded all the funds currently in the accounts directly and you will be responsible for paying the property taxes and insurance on your own.
Lenders Have Different Rules
Remember that different lenders can have different rules for establishing an impound account they can also have different rules for cancelling them. For instance, a lender might require the loan be at least one year old. And, the lender may also require there be no payments made in the past year more than 30 days past the due date.
If the property taxes are due within one or two months, the lender may require you to wait until the taxes are paid before proceeding with the request. It’s important to be clear that there are no universal guidelines lenders are required to follow when making a cancellation request. You don’t have to cancel all impound accounts at once, either. You can elect to have property tax impounds yet cancel your insurance impound account.
And, it’s okay if you cancel your impound accounts then later change your mind. You might discover that paying the property taxes twice per year and your insurance premium annually those cash withdrawals put a crimp in your cash flow.
If you decided to cancel and then a couple of years later find out that it’s more convenient to pay monthly amounts toward and impound accounts, all you need to do is contact your servicer once again and make the request. Note that if your property taxes or insurance are coming due soon while making the request to restore impound or escrow accounts, you’ll have to fund the accounts as if you had been making the monthly payments all along. In such a situation, it might be better to wait until after the taxes and insurance have been paid.
