An impound account or escrow account is used for deposits for your private mortgage insurance (PMI), homeowners insurance, property taxes and other costs required by your loan.
When an impound account is required, it will be maintained by your mortgage lender to collect insurance and tax payments that are not included in your loan. The annual costs are divided into a monthly cost that is added to your monthly mortgage payment. This extra payment you make every month is put in the escrow account to pay these expenses.
An escrow account is important as it gives your lender peace of mind that the state will not seize your home due to non-payment of taxes, and the home will not be destroyed without sufficient insurance in place. This is why escrow accounts are generally a requirement if you have a low down payment, as the loan is a higher risk.
While an escrow account is designed to protect the lender from risk, it can also benefit the homeowner. You will know that your insurance and property taxes are paid every month, which means you will not be required to come up with a large sum of money every year for these expenses.
Still, it is important to review your account balance and the payment history. This is because it is still your responsibility to pay these items if your mortgage servicer does not. Your monthly mortgage statement will include the balance of your escrow account. Your lender is also required to review this account every year to make sure it is collecting the right amount. Your monthly mortgage payments may go up if too little is collected to pay for insurance and property taxes, or you may be refunded if too much money accumulates in the escrow account.
You may have the ability to set up your own escrow account, but keep in mind this is usually not worth it, as you may need to pay a higher rate on your loan.
To demonstrate how an escrow account works, say you have a $1,200 annual property tax bill, plus a $600 annual insurance premium. This works out to a $150 per month which will be added to your mortgage payment.
It is important to remember that this impound account can cause your mortgage payments to fluctuate a bit, even with a fixed rate mortgage. The change will depend on property tax changes in your area, as well as any changes to your homeowner’s insurance premium.
You will also need to pay to start the escrow account when your loan closes, which usually involves paying several month's of taxes and insurance.
You may be able to have the impound requirement removed from your loan once you reach 20% equity in your property.