It can be challenging to come up with a specific and detailed budget when you finally decide to buy or purchase a house. And as if this wasn’t enough, it particularly becomes more complicated when you are told that part of your hard-earned money will be kept in an impound account.
A lot of new home buyers don’t even know what an impound account is and are taken aback when they see how much they have to shell out when it comes to closing the deal.
Now before you change your mind and do a 180 in buying that dream house, let’s answer the burning question in your mind, “What is an impound account? And why do I need to have it?”
The dictionary definition of the word “impound” literally means “to seize and hold in the custody of the law” or “to take possession of.” The more popular example of this would be with vehicles. A car that is being towed away is being impounded.
However, having an impound account is not as negative as it might sound.
If you’ve never heard of this term, depending on where you are from, impound accounts are known by various names. In fact, in a few areas of the country, impound accounts are sometimes known as escrow accounts.
According to the Consumer Financial Protection Bureau, an impound or escrow account is created by the lending company to hold part of the funds that you disburse for your regular monthly mortgage payments.
The impound or escrow account is then used to pay specific property-related charges, such as insurance premiums and property taxes, as needed.
Lots of mortgage servicers strongly require that you fund an impound account with payments for taxes and insurance before they would pay for your house bill.
Hopefully, as you continue reading this article, many questions about the purpose of your lender’s holding of funds, the operation of impound accounts, and whether they are necessary before closing on your house will become much clearer by the end of the post.
Simply put, your money for out-of-mortgage real estate costs like property insurance and taxes is kept in an impound account.
Because your lender is overseeing this, you don’t need to worry about keeping track of the account yourself. Even if you had the knowledge and know-how, your lender is probably more experienced with these matters.
This does not insinuate that you should disregard this account, as you might experience a fund shortage if and when your property taxes or insurance payments start to slowly rise.
In the event of an insufficiency, you are, of course, liable for the disparity. Again, in many places, impound accounts also are referred to as escrow accounts, so don’t be confused with these two terminologies.
The kind of loan package you select will essentially decide whether you need an impound account. An impound account is required for some government-backed loans (like FHA and USDA ones), without a doubt.
If the down payment is less than 20% of the purchase price and is made with a conventional or standard mortgage, the homeowner must maintain an impound account for their regular mortgage payments.
Additionally, local regulations may differ, so be sure to do extensive research.
There is some great news here, though. You might be eligible to get your impound account removed if you have a loan-to-value ratio of 80% or less and a high credit score.
You will nevertheless be personally liable for timely tax and insurance payments.
The homebuyers normally don’t have to worry about this, as the lenders should be able to calculate it in a very short amount of time once they have the basic numbers down.
The mortgage lenders normally compute a monthly fee which comprises both the annual insurance costs as well as the annual property tax. However, confirm with your lender if there are other recent charges that you might now be aware of.
A very well-known general principle for this calculation is to use the basic purchase price of the house and then multiply it by 1.25%. This is a good rule of thumb but might be affected by the homebuyer’s financial status and credit score.
Again, if you need to get the micro-details of the calculations, it is best that you talk to your mortgage lender and lay it out as much as you’d like.
This is not automatic as some would think. You start your impound account by simply putting in an initial deposit. Somewhat obvious, this process is called “funding the impound account.”
The primary benefit of establishing an impound account is that it reduces the possibility of failing to make your regular property payments because of unanticipated expenditures such as medical bills, auto repairs, etc.
Having your property expenses impounded or escrowed has some benefits like the following:
Earn a Discount:By simply choosing to get an impound or an escrow account, you may be qualified for a discount on the interest rate or even the final bill.
The payments are made by your lender:Your lender will pay your property insurance and real estate taxes on schedule; therefore, removing the excuses like “I forgot.”
Your monthly house payments are almost entirely sorted:The monthly charge you would need for your taxes and insurance is transferred automatically. This includes the month-to-month principal and interest mortgage amount. This can also be referred to as PITI (which simply means principal, interest, taxes, and insurance), and this is pretty much fixed. Be that as it may, just to be on the safe side, you should check your PITI at least once a year to check if there have been any actual changes to your account.
No huge yearly payments:Almost all of us struggle to save money for purchases, especially when a previous considerable expense is due soon. Impound accounts collect the money on a monthly basis rather than all at once through a hefty annual expenditure that may be difficult for anyone to pay.
Due to its simplicity and almost no-brainer approach, you might forget to double-check your insurance: Because your payments are deducted automatically, it’s possible to overlook the necessity of examining your insurance rates annually or every two years.
About 70% of homebuyers don’t perform any research before purchasing home insurance, according to a 2017 report by Hippo Insurance. This is a terrible percentage. Due to this, the majority of people most likely do not even have a reasonable scope of the kind of insurance for their properties.
You won’t have to worry much about overseeing your impound or escrow account because your lender should take care of this for you, both as part of the benefit and as a perk for choosing their services.
You can keep track of your impound account pretty easily because your mortgage statement most likely displays it. And if it does not, the lender is just one call away.
In accordance with federal requirements, lenders are required to check their customers’ annual impound accounts to make sure the right amount is being collected (and deducted as the need comes up).
If the lender consolidates too little money, they will request additional funds. And if they receive too much, they will simply do an escrow reimbursement.
You’re probably asking how it’s even feasible for your impound account to run out of money when your lender should be managing it. Remember, property and insurance taxes can change yearly, and this can even happen with “fixed-rate” home loans. And this is not out of the ordinary.
This might seem very improbable, but you can possibly keep running out of impound account money each month if the insurance fees or property taxes fluctuate significantly.
One alternative is to request the lender that, until there are sufficient finances in the account again, a portion of each one of your contributions, meaning the regular mortgage payments, go toward the aforementioned insurance and property tax payments.
A few lenders will allow you to put together an autopay “deal” with them so that all expenses are automatically taken out of your savings or checking account on the agreed deadline.
After reevaluating the loan, the lender will typically start the repayment process or choices that you have settled on.
Additionally, if you want a last resort option, you might look for less-priced insurance companies. You can do this to decrease the annual payment of your insurance and the total sum that should be in your impound account. Nonetheless, keep in mind that the usual logic is that the lower the price, the lower the quality of service. So watch out for that.
An impound account is a secure place to keep your money until you need it for basic expenses like homeowner’s insurance fees, property taxes, and other annual costs.
You are still in charge of covering many house expenses such as real estate taxes, as well as any other costs associated with your house that is not covered by your mortgage; you’re going to have to pay this, with or without an impound account.
In order to safeguard their investment, the lender can thoroughly convince and push you into an impound account, especially if you somehow fail to pay your insurance and other required taxes.
Insurance and taxes are obligations that must be met whether or not you use an impound account, so you should prepare to pay them. This is a non-negotiable part of the system.
This article has given you as much information as possible for you to make the wisest decision. Nevertheless, you have to do your own due diligence and research before finally deciding whether you are ready to start finalizing your house purchase.