The term impound account is often used interchangeably with escrow account.

Now that is just plain confusing. Haven’t we already learned that escrow is a process to facilitate the exchange of real property, etc. Now they throw us another curve ball. Let’s see if we can clear this up. A secondary definition of escrow is ” a fund or deposit designed to serve as an escrow – in escrow: in trust as an escrow (had $1,000 in escrow to pay taxes).” Mortgage statements will vary by lender.

So just what is an impound/escrow account? 

Each month when the homeowner makes a mortgage payment an additional amount is collected and set aside until the payments for these bills are due. The lender must provide an annual accounting of how much was collected and dispersed. If the amount collected was insufficient to cover the expenses, the bill will be adjusted upwards for the following year. If too much was collected, a refund will be issued to the homeowner.

So who has to have an impound account?

 All FHA and VA mortgages are required to have such an account. Any borrower obtaining a conventional mortgage with less than 20% equity must also set up such an account. Everyone else has the option of using this as a tool to help them budget for these substantial expenses.

But why are they picking on me?

The mortgage holders are at risk if a homeowner fails to pay their property taxes or insurance. In the case of non-payment of property taxes a county can seize the property forcing a sale to pay the taxes. This supercedes the lenders interest in the property and you know how the banks hate to lose money. When a property tax bill remains unpaid, a lender has the right to foreclose even if the mortgage is current. (Read the small print in the Deed Of Trust – you’re not alone, no one ever does.)

The banks position is that when a homeowner has 20% or more of equity in a home, the owner is much less likely to risk the loss of that asset due to non-payment of taxes.

The insurance issue is pretty clear; you have no insurance, the house goes up in flames, so does the lenders collateral, another thing that makes them really angry. And you know how we love to keep them happy.

How do I set up an escrow account?

If you are buying a home, the arrangements are made as part of your mortgage financing. The month in which you close your purchase will determine how much money will need to be collected as part of your closing costs. It depends upon how near tax time is to the closing date. In California the tax bill is divided into two segments. The first 1/2 is due Novemebr 10th and late after December 10th. The second 1/2 is due February 1st and late after April 10th.  If it’s within 60 days of tax time, the entire 1/2 year of payments may be required at closing. If taxes are paid at closing, no more than 3 additional months will be required to be impounded/escrowed for next year’s tax payments.

When your loan documents are created by the lender an instruction is given to the escrow officer detailing the number of months required.

I already have a mortgage but I think I could use an escrow account, what do I do?

Check your mortgage statement for the customer service telephone number and give them a call. Be prepared and have a snack handy, you may be on hold listening to elevator music for quite some time.