Are you considering applying for a mortgage or refinancing an existing one? If so, understanding the ins and outs of impound accounts can help make the process smoother. Impound accounts are written into most mortgage agreements — but what exactly are they, and how do they work?
In this article, we'll take a closer look at these key elements in home financing to help ensure you can make an informed decision when it comes time to sign your loan documents.
By doing your due diligence upfront, you can save yourself from unexpected costs down the line and give yourself peace of mind while transferring ownership of your property.
Read on to learn more about impound accounts!
What Is a Mortgage Impound (escrow) Account
A mortgage impound (escrow) account is a special account managed by the lender that holds money collected from you each month to pay your property taxes, homeowners insurance, and other items.
The lender collects this money as part of your monthly mortgage payment and deposits it into an impound or escrow account. This ensures that all necessary payments are made on time, and it protects the lender by ensuring that the taxes and insurance are paid.
The amount of money held in an impound (escrow) account will vary depending on your loan terms, including how much you owe for real estate taxes and homeowners' insurance. Generally, lenders will require between two and 12 months of taxes and insurance to be held in the account.
When it's time for your taxes or insurance payment, the lender will withdraw the money from the impound (escrow) account and pay on your behalf. No additional payments are required if you have enough money in the account. However, you must pay to cover the shortfall if there needs to be more money in the account.
Why Is a Mortgage Impound (escrow) Account Important
A mortgage impound (escrow) account is an important way to ensure that homeowners can manage their finances effectively and prevent any potential financial difficulty in the future.
With a mortgage impound account, homeowners can make regular monthly payments towards taxes and insurance premiums instead of large lump payments when they come due at the end of the year. This helps to spread the expense over the entire year, making it more manageable and less burden on homeowners.
Having an escrow account helps protect homeowners from any potential increase in taxes or insurance premiums. By setting money aside each month into their impound account, they can build up a reserve that can be used to pay any increases that may happen within the year.
Having a mortgage impound (escrow) account is important because it allows homeowners to budget effectively and plan for major expenses that come with homeownership, such as property taxes and insurance payments.
This makes it easier to make well-informed decisions about how much they can afford in terms of mortgage payments and any other financial obligations they may have. An escrow account provides peace of mind and is an important part of responsible homeownership.
How You Set Up Mortgage Impound (escrow) Account
The steps for Setting up Mortgage Impound Account are as follows:
- The first step is to sign your loan documents, which include a disclosure statement that explains the escrow account process and requirements.
- After signing the documents, you’ll need to provide your lender with information on where you want your funds held for the escrow account. Generally, lenders will have an account set up with a third-party institution such as a bank or title company.
- The next step is to deposit your initial funds into the escrow account. This includes any down payments, closing costs, and other related fees due at closing.
- Once the money is deposited, you will typically receive statements every month that provide detailed information about the escrow account. The statements will list all deposits, withdrawals, and any account balance changes.
- Finally, when taxes and insurance payments are due for your home loan, your lender will withdraw the funds from the escrow account to cover these expenses on your behalf.
Different Types Of Escrow Accounts And Which One Best Suits Your Needs
Different types of escrow accounts are available to best suit different needs.
A transitory escrow
A transitory escrow account is intended for short-term transactions like real estate sales. The escrow holder holds the money until the transaction is finalized and then releases to the appropriate parties.
A construction escrow account
A construction escrow account allows funds to be placed in an account that a contractor can draw on to pay for expenses related to a construction project. The buyer will deposit money into the escrow account, and when the contractor has completed the project, they will be paid based on a predetermined schedule.
A tax escrow account
A tax escrow account holds funds to pay taxes or insurance premiums. Funds are set aside in this account so that when taxes and insurance payments become due, enough money will be available to make the payments without interruption.
When deciding which type of escrow account best suits your needs, consider the length of time that the funds need to be held, who will be responsible for paying taxes and insurance premiums, and how the funds will be released once the transaction is complete.
Knowing the details of your specific situation can help you make an informed decision about which type of escrow account to use.
Understand The Fees Associated With The Mortgage Impound Account
Lenders typically charge an initial setup fee when setting up an impound account. This fee covers the lender’s cost for setting up the account and can be anywhere from $50 to $500, depending on the size of your loan.
In addition to the setup fee, lenders may impose other fees for maintaining the impound account. These include a per-transaction fee for payments from the account, annual maintenance fees, and late payment fees.
While impound accounts can be a convenient way to manage your mortgage payments, it is important to understand the associated fees before signing up.
Benefits Of Having a Mortgage Impound (escrow) Account
- When you have an impound account, all your taxes and insurance payments are taken care of automatically.
- Because the funds for taxes and insurance are held in the impound account and then paid periodically, your monthly payments will be lower since you don’t have to pay these amounts all at once.
- When you have an impound account, you are less likely to miss a payment or pay late fees for taxes and insurance costs.
- An impound account can provide financial protection as you are less likely to face large, unexpected bills when taxes and insurance payments come due.
- Depending on your account type, you can earn interest on the money in your impound account.
FAQs
Are impound accounts required on all mortgages?
No, impound accounts are not required on all mortgages. Impound, or escrow accounts are separate bank accounts established for the borrower.
What are some tips for maximizing the benefits of an escrow account?
To maximize the benefits of an escrow account, you must ensure your funds are allocated properly. Regularly review your escrow balance, and consider shopping around to compare different lenders’ terms when setting up an escrow account.
How often are funds withdrawn from the escrow account?
Funds will typically be withdrawn from the escrow account regularly as needed for property taxes or insurance premiums.
Conclusion
While having a mortgage impound (escrow) account is not necessarily required, it can provide you with many benefits and financial peace of mind - especially if unexpected expenses arise. Whether you're responsible for a tight budget or proud to have saved up the necessary funds, a mortgage impound (escrow) account is the perfect way to ensure these expenditures are handled without any unexpected hiccups.
