Impound Accounts

Most mortgage loans come with an impound account for paying property taxes and homeowner's insurance.

Impound accounts are also called escrow accounts.  But the word "escrow" has about a dozen meanings in the mortgage world.  When you're under contract, you're in escrow.  You'll sign your loan documents with an escrow agent who works for an escrow company.  So I try to use "impound" account so as not to add to the escrow confusion.

Impound accounts are pre-funded at closing.  Every month, homeowners contribute 1/12 of the annual cost of property taxes, homeowner's insurance, and mortgage insurance (if applicable) to the account.  The lender then pays those items as they become due throughout the year.

How much will you pay at closing?  You'll always pay your first year's homeowner's insurance premium plus two to three months.

But the amount you contribute for property taxes will depend on your closing date.  In Washington, one half of property taxes are due in April and the second half is due in October.  Let's assume your loan closes in January.  That means your first mortgage payment would be due in March.  You'd only make one payment (March) before six months of property taxes were due.  So you'd pre-fund your impound account with five months of property tax payments.

Check out the example below:

This is from an Initial Loan Estimate.  This customer's insurance is estimated to be $600/year ($50/month).  And property taxes are $1,678/year (or $139.82/month).  He is paying his first year's insurance premium at closing ($600) and depositing three months of insurance payments into his impound account ($150). 

His closing date is in August and his first mortgage payment will be due in October.  He'll need to contribute six months of property taxes to his impound account ($839) so the lender will be able to make the second half tax payment on October 1st.

Are impound account required?

Sometimes.  Government loans (FHA, VA, and USDA) always require impound accounts.  Conventional loans only require impound accounts with down payments of less than 15-20% (the exact requirement varies from one lender to the next).  Buyers who put at least 15-20% down can waive their impound account for a one-time fee equal to 0.25% of their loan amount.  (Except in a couple states where escrow waiver fees are illegal.)

If you already have an impound account and decide you'd rather pay taxes and insurance on your own, call your lender.  They will probably make you sign a disclosure and pinky swear to pay these items yourself.  Then they'll cancel your impound account and refund your balance.  No fee required.  Note:  Only do this if you legitimately believe coming up with property tax payments every six months will not be a hardship or you're very good at saving!  It's a ton of money!