Impound Account – Escrow Accounts
During the most trying financial times, it is difficult for homeowners to receive letters from their mortgagee scheduling a mortgage payment increase due to interest rate hikes on a variable mortgage account. Another upsetting scenario may be a notice advising that due to the increase of property tax rates and/or hazard insurance premium, there will be an increase in the necessary monthly savings deposit to replenish the impound or escrow account. It is a basic expectation that taxes and insurance usually increase annually causing a necessary adjustment to the escrow or impound account.
Why an Impound Account?
Impound and Escrow account are used interchangeably; they both refer to a savings account set up by banks and mortgage companies to save up enough money to pay out the next installment of property tax and property insurance due on behalf of the mortgage holder (homeowner). The bank or mortgage company will usually require the homeowner to save an amount equal to the total of the prior year’s property tax and property insurance plus 10% to take into account the possibility of rate increases; this total amount is divided by 12 and added as part of the total monthly mortgage payment. As this savings account grow throughout the year, the bank is required to pay a minimal rate of increase to the homeowner.
Details of an Impound Account
Upon inception of a new account, the mortgage company must assure that there are enough strarting reserves so that upon being presented with the first anticipated invoice, there will be enough money in the account to satisfy either the property tax or the property insurance. When a home is first purchased, it is common for the property insurance to be prepaid; however, property tax must simply be paid up to date.
An impound account shortage is nothing to do with the loan’s Principal and Interest. The impound account is simply a savings account separately connected to the mortgage billing. Property taxes do increase annually, and it is common for property insurance to increase based on rate adjustments and slight annual increases in property coverage in order to keep up with the increased reconstruction cost of dwellings (building supplies and/or labor cost).
There are times that banks or mortgage companies incorrectly compute the initial deposit and will notice that the continuation to collect the same initial monthly deposit from the customer will not be sufficient to pay the invoices when they come due.
Prevention of a Shortage in an Impound/Escrow Account
There are a few options available to homeowners:
- Seek Cheaper Home Insurance
- Reduce Insurance Coverage or Increase Policy Deductible
- Make an Additional Impound/Escrow Account Deposit
- Simply comply with pay an Increased Escrow or Impound deposit payment
Self Managing Your Taxes and Insurance
For those that possess the financial discipline to save a monthly sum to self pay taxes and insurance, an impound or escrow account would not be necessary; however, you must note that some loan programs may require the customer to have established an impound account.