An impound account is money maintained by mortgage companies to collect amounts such as hazard insurance, property taxes, private mortgage insurance, and other required payments from the mortgage holders. These payments are necessary to keep the home, but are not technically part of the mortgage.
Key Takeaways
- Impound accounts help mortgage holders pay property taxes and insurance gradually, avoiding large lump-sum payments.
- Borrowers with less than 20% down payment often need impound accounts to protect lenders from liens or losses.
- Lenders must review impound accounts annually to ensure the correct amounts are collected, adjusting if needed.
- Borrowers can opt for impound accounts even if not required, though their funds might earn less interest.
- Excess funds in an impound account must be refunded to the borrower if over-collected.
Exploring Impound Accounts
Impound accounts hold funds collected by the mortgage provider and held in trust for eventual use. Funds come from borrowers’ payments to hazard insurance policies, private mortgage insurance policies, local property taxes, and other required fees.
Impound accounts are often required of borrowers who put down less than 20%. The purpose of the impound account is to protect the lender. Because low-down-payment borrowers are considered high risk, the impound account assures the lender that the borrower will not lose the home because of liens or loss, as the lender pays insurance, taxes, etc., from the impound account when they are due. However, buyers don’t need to maintain impound accounts forever. Once sufficient equity (usually 20%) is achieved, lenders can often be convinced to close the impound account.
Though the impound account is designed to protect the lender, it can also help the mortgage holder. By paying for these big-ticket housing expenses gradually throughout the year, the borrower avoids the sticker shock of paying large bills once or twice a year and is assured that the money to pay those bills will be there when they need it. However, if the mortgage company does not pay these bills when they are due, the borrower will be held responsible, so borrowers should keep an eye out to make sure their mortgage companies are fulfilling their end of the bargain.
Federal regulations help borrowers keep an eye on the status of their mortgage accounts by requiring lenders to review borrowers’ impound accounts annually to ensure that the correct amount of money is collected. If too little is being collected, the lender will start asking you for more; if too much money is accumulating in the account, the excess funds are legally required to be refunded to the borrower.
Choosing or Opting Out of Impound Accounts
Sometimes, a mortgage impound is not required, but a borrower can elect to have one. On one hand, a mortgage impound may tie up money that might be better used elsewhere. Not all states require lenders to pay interest on funds held in impound accounts. Of those states that do require it, interest earned likely wouldn’t approach the returns that could be earned by investing the money. Although the impound account is designed to protect the lender, it can also be beneficial for the borrower. By paying for big-ticket housing expenses gradually throughout the year, borrowers avoid the sticker shock of paying large bills once or twice a year.