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Don’t feel overwhelmed when buying your first home or if it has been a while since your last purchase or refinance! An escrow account is sometimes called an impound account, there is no difference. The following are key elements of the escrow account:
- Purpose of escrow account? An escrow account is a separate deposit account that your mortgage company uses to pay your property taxes and homeowners insurance. You will pay an additional amount with each monthly mortgage payment which is deposited into your escrow account.
- Is there a benefit to the homeowner? The money in this account will saved up during the year, and when your the annual property taxes and homeowners insurance are due, the mortgage company will disburse payment from the escrow account. This will minimize the stress of paying large sums at one time for property taxes and homeowners insurance as they come due.
- Any benefit to mortgage company? Since the mortgage company holds a lien on the home, it has an interest in making sure that taxes and insurance are paid on time. Homeowners are bound by the mortgage contract to carry homeowners insurance on the property and list the bank or mortgage company as ‘Mortgagee’ on the insurance policy. The bank has a priority in making sure there is no lapse in homeowners insurance during the term of the mortgage.
- Is the escrow account compulsory? Although some types of mortgages require an escrow/impound account as a condition to the loan, there are cases where the mortgage company may allow the independent management of property tax and insurance payments directly by the homeowner.
- What are the negatives of an impound account? If the homeowner is a responsible saver, he/she may not need the help of a forced savings account. Those who don’t have a fixed income may prefer to save up for annual invoices at their own pace.
- Can I change my mind? The requirement for an escrow account is usually written into your mortgage contract, but this can sometimes be renegotiated with the bank. It is common for mortgages to be sold many times over the life of the loan, and each mortgage company will have different policies regarding escrow accounts.
If you are unsure about whether an escrow account is a good idea in your case, you should make an appointment with a loan specialist who will advise you based on your specific circumstances.
