Straight Talk About Real Estate

Impounds, or an escrow account, is the monthly payment that a homeowner makes towards the payment of his property taxes and property insurance.

Property taxes are due twice a year, and property insurance is generally renewable once a year. Instead of paying a large sum as they are due, an impound account allows you, the owner, to pay it monthly by dividing those payments into 12 equal payments. When the payment is due, the servicing company who collects these payments will make the payment for you. There is no fee for this. However, your impound account collects two months of payment in advance to ensure you have the money there when it is due. So in that sense, your money is tied up in the impound account. It is actually a forced savings account with no interest paid for your money.

You pay towards your impound account at the same time you make your mortgage payment. It is beneficial for people who may forget to set aside money to pay the lump sum of property taxes and property insurance. If you are late in paying property taxes, even if by one day, there is a big penalty. The county extends no mercy.

If you generally have a cushion in your personal savings account, and disciplined in setting aside money, you should not have an impound account. It is better to have your money in your control rather than with the someone else.

However, you are required to have an impound account if your loan exceeds 80% of the value of your house. This is because the lender’s risk is high, and they want to protect their investment by ensuring that you will pay your property taxes and property insurance.

If you have a CLTV of over 80% but using a piggyback loan, you are not required to have an impound account. The first loan is at 80% which would not require impounds, and the second loan covered their risk with a higher interest rate.

If you are not required to have an escrow account, you can still choose to have one to help you budget.