An impound account, also known as an escrow account, lumps your tax and insurance payments into your mortgage payments. Not every mortgage loan requires an escrow account, and they’re not necessarily permanent. You can get your impound account waived after your loan-to-value ratio reaches 80%. You can sometimes choose to have an impound account even when it’s not required if you feel it will help you keep on top of your tax and insurance payments.
While researching mortgage loans, you may have come across the term “mortgage impound account” (or escrow account). This account groups your property tax and insurance payments into your mortgage payment. This way, you pay off your property taxes and insurance premiums monthly rather than once a year. In addition to these payments, your impound account ensures your mortgage lender that you are not a risk, as the account balance includes additional funds for property-related expenses.
Some (but not all) mortgage loans require an impound account. Even when not required, some homebuyers may still choose to have an escrow account. While there are definite advantages to having an impound account, these accounts also have disadvantages. So how do you know if an impound account is right for your lifestyle?
What is an impound account?
An impound or escrow account is an account used to collect payments that are part of your home expenses not included in your mortgage, such as taxes and homeowner’s insurance. Due to the fluctuation in these costs, payments from this account are likely to change.
Though these payments are not part of your mortgage loan, making impound account payments are necessary for keeping your home. Your mortgage lender will manage your impound account.
This account is not permanent. Once the property gathers enough equity, the borrower may choose to discard the escrow account.
Understanding mortgage impound accounts
These monthly installments include payments toward property taxes, home insurance premiums, hazard insurance, and private mortgage insurance. While not every homeowner needs one, many lenders ask for an impound account if the homebuyer provides a down payment of less than 20%.
Not everyone can afford a large down payment, and that’s okay. However, lenders see this as a risk, which the escrow account offsets. In the event you don’t make a mortgage payment, the lender can use the funds from the impound account instead.
How does an impound account work?
Payments for your insurance or taxes are added to your impound account. Your lender divides insurance and tax payments and adds them to your mortgage payment. This allows you to pay monthly in small amounts towards your annual property taxes and insurance as opposed to one big payment.
However, because your lender makes these payments, it’s easy to forget about your insurance rates. Be sure to check on your insurance rates regularly, once or twice a year, and estimate what your monthly amount will be.
Can I withdraw money from my escrow account?
Neither borrowers nor lenders can withdraw money from an escrow account. The money in the account is only used for paying property taxes, insurance premiums, or homeowners insurance.
What are the pros and cons of an impound account?
Impound accounts can be great for some homeowners, while others have trouble managing them. Consider the pros and cons below before deciding on whether an escrow account is right for you.
Here is a list of the benefits and drawbacks to consider.
- Mortgage lender manages homeowners insurance and property tax payments
- Smaller monthly payments instead of large annual payments
- May be eligible for discounts on closing costs or interest rates
- Higher monthly payments because tax and insurance costs are included
- Monthly payment could change due to property tax fluctuations
- Cash required with signing to cover the startup costs
When is an impound account mandatory?
Impound accounts are mandatory under certain loans and circumstances. You’re required to get an impound account if:
- You have a government-backed loan, like an FHA or USDA loan.
- You buy a home with a conventional mortgage loan with less than a 20% down payment.
- An escrow was waved before, but the borrower failed to make the payments on time.
- You were previously delinquent for at least 60 days in the past two years.
- You have been delinquent on payments within the last 12 months.
Because an escrow account protects the lender, a borrower that presents certain risks may be asked to get an impound account. If you want better terms in your home loan but don’t know where to start looking, use the tools below to see SuperMoney’s mortgage loans reviews and comparisons.
Can mortgage impounds be optional?
Borrowers can still choose to have an impound account even if it’s not required. This includes paying off large bills monthly instead of once or twice a year.
However, as you saw above, there are some disadvantages as well. If a mortgage servicer fails to pay property taxes and insurance, the homeowner may face consequences. Meanwhile, money that goes towards an escrow account may be helpful elsewhere.
Take these factors into consideration before opting into an escrow account.
How can I remove my impound account?
You can usually get your impound account removed once your loan-to-value ratio is at least 80%, or if you’ve accumulated 20% or more in equity.
Do I need to monitor my impound account?
Although mortgage lenders manage impound accounts, you should still monitor the account yourself to ensure the account contains the correct amount of funds. You can find the balance of your impound account in your monthly mortgage statement.
If there is not enough money, your loan servicer should ask for more. If there is too much money, your lender is legally required to refund the money to the borrower.
What happens if I experience an escrow shortage?
An escrow shortage means there aren’t enough funds in the account to make the payments. If this occurs, your lender bills you for the amount owed to make up the difference.
What’s the minimum balance for an impound account?
When you first open an impound account, lenders often ask for two months of payments to cover startup costs and any increase in taxes and insurance costs. This guarantees payments continue even if the borrower stops paying.
- Impound accounts collect money to pay for tax and insurance costs to your monthly mortgage payment.
- Some mortgages, such as government-backed loans, require escrow accounts.
- Because the cost of taxes and insurance fluctuates, your monthly payment is subject to change.
- Even though your mortgage lender handles tax and insurance payments, you should still regularly check your account’s funds.
Finding the right deal for you
Regardless of whether an impound account suits you, make sure you choose the mortgage loan that fits your budget. SuperMoney allows you to compare mortgage loans and lenders right from your home, making it easy to find the best loan for your unique situation.
- What is an escrow or impound account? — Consumer Finance Protection Bureau
- § 1024.17 Escrow accounts. — Federal Deposit Insurance Corporation
- Best Mortgage Lenders | February 2022 — SuperMoney
- Best Mortgage Lenders for First-Time Homebuyers | February 2022 — SuperMoney
- Buying a House? Here’s How to Choose the Best Mortgage Lender — SuperMoney
- What is a Blanket Mortgage? — SuperMoney
- What is a Qualified Mortgage? — SuperMoney
- What is a Mortgage Note? — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.