What Is an Impound Payment?
An impound account, also sometimes referred to as an escrow account, is an account that is held by a mortgage company or third party which collects payments from a borrower on a monthly basis. Then when a bill comes in that needs to be paid, the impound account pays the bill. By collecting the money ahead of time, the impound account provides a sense of assurance that the appropriate amount of money will be on hand. Impound payments are often made to insurance companies or tax collection departments.
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Tax Payments
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Often times tax payments are made on a bi-yearly basis and are tied to the value or purchase price of the property. When the buyer makes his monthly housing payment, it may include a property tax payment which has been impounded. This means the property tax has been added to the monthly mortgage payment. If there is an adjustment in the amount of property tax due, then the monthly housing payment will change accordingly. For instance, if the property taxes are lowered by the city, county or state, then the monthly housing payment will be less because the impounded property tax due is lower. If the property taxes are raised, then the monthly housing payment will be higher to reflect the change in the city, county or state tax structure.
Insurance Payments
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Many times a bank wants to ensure that the borrower as adequate insurance on their home. This will protect the banks investment should something go wrong and damage the home or property significantly. Types of insurance that may be required for a borrower includes fire insurance, flood insurance and personal liability insurance. Like the tax payments, small amount of money are set aside each month from the buyer's lump sum payment to pay the insurance company when the bill comes due.
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Statements
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Impound account statements are often sent to the borrower on a regular basis in accordance with when upcoming payments are due. This will allow the borrower to see if additional monies need to be paid to the impound account. If there is an overage, an impound account will usually cut a check back to the borrower at the end of the year. It is important to pay attention to your impound account statements as ultimately the responsibility of paying taxes, insurance or other impounded accounts is up to the borrower.
Cost
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Many lenders will require that you make "seed" payments to start an escrow account. Seed payments are funds that are deposited ahead of the sale to ensure that there is enough cash for taxes and insurance from the moment you legally own the house or property. Depending on the lender, the borrower may be required to seed between two and eight months of payments for taxes and insurance in the escrow account. Seed payments differ from normal payments because once the buyer has legally purchased the home or property, they will be making payments to the escrow account for the property taxes and insurance due on a monthly basis. To calculate how much money is required to seed your escrow account, simply add the yearly property taxes to the yearly insurance premium and divide by twelve. Then multiply that number by the number of months your lending institution requires to be in the impound account. For example if your yearly taxes were $6,000, insurance was $1,000 and the bank required six months of payments, the equation would read:
($6,000 + $1,000) / 12 = $583.33
$583.33 x 6 = $3,500
You would need to seed this account with $3,500.
Removal
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Some borrowers wish to make payments for taxes and insurance on their own. This is because in the interim while they in between tax or insurance bills they can invest their money into safe investment vehicles that earn a rate of return on their money. Short term CD's, money market and savings accounts are examples of where a borrower might want to put their money in between tax and insurance payments. When a borrower reaches 20 percent equity, they can request that the impounded accounts be removed. Ultimately it is the mortgage companies decision on whether to remove them or not.
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References
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