Impound Account

The term Impound Account or Escrow Accounts means a bank account which is set up by the lender to collect future property taxes and insurance bills from the borrower. In an owner occupied mortgage the lender may request you to open an impound account if the loan taken is 90% or more than the purchase price of the property. However, in a non-owner occupied property you can open an impound account even if the loan taken is less than 90% of the property value. You can avoid an impound account by increasing the down payment. This however varies from one lender to another. If the lender wants you to open an impound account then he should make a clear disclosure about the operation of this account.

How the Impound Account Works?

After the impound account is opened, the lender is entitled to collect money from you totally on the basis of your future property taxes and insurance bills. The lender collects money at the time of closing to fund the impound account. Generally after the closing, the projected property taxes and insurance bills are collected by the lender on a monthly basis. The amount so deposited is used by the lender to pay the property taxes and insurance bills when they become due and in return you receive an interest.

Advantages:

• The main advantage of impound account is that you are forced into a savings plan. This is particularly useful if you fail to make proper savings or if you are under a tight budget.
  
• Investors can keep record of the payment towards taxes and insurances as the whole amount is maintained by a particular account.
  

Disadvantage:

• The interest earned from an impound account is much less than the interest rate can be earned from outside investments.
  
• Another disadvantage is that you cannot use the money accumulated in the impound account.
  

You should have a home equity of at least 20% so that you can close the impound account. For this you need to make your payments on time and it should be current. Anybody can request for an impound account. You have to attach a form along with your loan documents indicating the preferences of having an impound account. You should inform your lender in case you choose to open an impound account later on. Setting an impound account is absolutely free.

You should check the statements regularly because lenders may fail to pay your property tax and insurance bills. In case the lender does not pay from the impound account, penalty will be charged on them. If your loan is sold to another then you need to check if the new lender is carrying an accurate balance of your impound account.