An impound account is an account that is used as a deposit box for the payments of private mortgage insurance or PMI, homeowners insurance, property taxes and any other type of insurance that is required depending on the loan type. The person that will be responsible for this account is the lender of the loan. The lender will ensure and collect the tax and insurance payment that is part of the home loan. Keep in mind, this payment will be divided into monthly payments to make it easier on the home buyer. Because the payment is divided into monthly payments, the payments will be added to the monthly mortgage payment. The extra money paid will be put into this separate impound account to cover the insurance or tax payments.
Potential home buyers who put less than 20% down on a home are considered a risk and usually have a higher interest rate as well as a higher amount of insurance and taxes to pay. This is why a separate account is set up to ensure that in case of default on the loan, the state will not take the property for non-payment of taxes. In addition, the lender will want to have confidence that the homeowner has homeowners' insurance in case of a disaster that destroys the home.
An impound account is initially set up to protect the lender. However, the impound account may also be beneficial for the homeowner as well. Instead of coming up with a large sum of money once a year to pay for property taxes and insurance, the impound account will allow the homeowner to pay monthly so it’s not a huge bill annually.
It is always a good idea to know where the current balance of the impound account is. If the lender fails to make the payment on the taxes or insurance, it is ultimately the homeowner's responsibly. It is part of the lender's job and is required by law to review each impound account. If not enough money is being collected each month to cover the bill, the lender can request a higher amount. If too much money is being paid into the account, then the excess money will be refunded to the homeowner. In addition, there is always an option for the homeowner to set up their own impound account, however if the homeowner chooses this option, then the lender can charge a higher interest rate. It’s not a bad idea to allow the lender to take care of this portion of payment.
It is important to know that even with a fixed rate loan, the monthly mortgage payment on the impound account can fluctuate. Reason being is because if the homeowner's insurance or property taxes change, then the impound account bill will change. This is a completely different charge then the monthly interest and principle payment on the home loan. In addition, the home owner can request from the lender that the impound account be removed from the loan once the home builds up a certain percentage of equity.