Impounds
Definition and meaning of Impounds in real estate.
Impounds, also known as escrow accounts in many regions, are funds collected monthly by a mortgage lender to pay for property taxes and homeowner insurance on behalf of the borrower. The lender adds a portion of these annual expenses to the monthly mortgage payment, holding them in a reserve account until the bills come due.
In more detail
Lenders use impound accounts to minimize risk, ensuring that property taxes and insurance premiums are paid on time. If a homeowner fails to pay property taxes, the local government can place a tax lien on the property, which takes priority over the lender's mortgage. Similarly, if hazard insurance lapses, the lender's collateral is left unprotected.
Many lenders require an impound account for buyers who put down less than twenty percent of the purchase price. While some borrowers prefer the convenience of not managing large, semi-annual bills, others prefer to pay their taxes and insurance directly to maintain control of their funds and earn interest.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Escrow account, reserve account |
| Required for | Typically mandatory for loans with high loan-to-value ratios |
| Typical items paid | Property taxes, homeowner hazard insurance, and private mortgage insurance |
A borrower's monthly mortgage payment includes one thousand dollars for principal and interest, plus three hundred dollars in impounds that the lender reserves to pay the annual property tax bill in December.
Frequently asked questions
Can I cancel my mortgage impound account?
Many lenders allow cancellation once the home equity reaches twenty percent, provided the loan has a history of on-time payments.
How does a lender calculate the monthly impound amount?
Lenders divide the estimated annual property tax and insurance bills by twelve, and they may hold a cushion of up to two months of payments.