Aug 14, 2017

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.  Then homeowners contribute 1/12 of the annual cost of property taxes, homeowner's insurance, and mortgage insurance (if applicable) to the account each month.  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:

Initial Loan Estimate Impound (Escrow) Account

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.

Impound (Escrow) Analysis
Once a year, your lender is also required by law to conduct an impound (or escrow) analysis.  They'll analyze your impound account along with any changes to your insurance premiums or property taxes (which are almost guaranteed to increase).

Lenders are also allowed to keep a two month cushion in your impound account.  I don't know why they do this, other than to hedge against the fact that your property taxes will increase at some point during the year.

Check out the escrow analysis below.  This person owes $658.20/yuear for homeowner's insurance and $2,365.98/year for property taxes.  $658.20 + $2,365.98 = $3,024.18 / 12 x 2 = $504.03 cushion required by her lender.  Mortgage insurance premiums aren't included when determining cushions.  I have no idea why.

Mortgage Escrow (Impound) Analysis

Now check out the schedule of anticipated payments from this homeowner's impound account.  In April, 2017, the balance is projected to be $241.02.  That's a shortage of $263.01.  The homeowner now has the option of sending her lender a check for $263.01 to cover the shortage.  Or the lender will divide the shortage over the next 12 months by increasing her impound account payment by $21.92/month.

Are impound accounts required?  Sometimes.  Government loans (FHA, VA, and USDA) always require impound accounts.  Conventional loans only require impound accounts with down payments of less than 20%.  Buyers who put at least 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).