What Is a Mortgage Impound Account?

By now, you've likely heard the term "escrow" more than a few times throughout your home buying experience. However, the role of a mortgage escrow impound account is very different than the real estate escrow account used by buyers and sellers when closing on a new home.

So what is a mortgage escrow impound account? And how does it affect your monthly mortgage payment?

What is a Mortgage Escrow Impound Account?

A mortgage impound account - also known as an escrow impound account - is a financial account set up by a lender or loan servicer to collect the expenses of property taxes, homeowner's insurance and mortgage insurance (if applicable). Borrowers make monthly payments into the impound account that amount to 1/12 of their total annual tax and insurance premium costs. Your lender then uses the funds collected in your impound account to pay those bills on your behalf.

For example, if your property taxes and insurance add up to $5,000 a year, you'll need to add approximately $417 to your mortgage payment, though these costs may fluctuate from year-to-year, particularly as tax rates change.

A mortgage impound account is similar to a savings account, but one that's dedicated to tax and insurance. Instead of paying a large lump sum on an annual or semi-annual basis, these fees are automatically consolidated into your monthly mortgage payment so you don't even have to think about it.

Who Is an Impound Account For?

Borrowers who obtain a mortgage through the Federal Housing Administration (FHA), most loans administered through the Department of Veterans Affairs (VA), and homeowners who have put down less than 20% are typically all required to have a mortgage impound account.

Can I Opt Out of Mortgage Impound?

Generally, when you take out a conventional loan your mortgage lender will require an escrow account if you borrow more than 80% of the value of the property. This means that if you make a down payment of 20% or more, or have 20% equity, your lender probably will waive the escrow requirement if you request it.

If you are obtaining an FHA loan, you must establish and maintain an impound account. It is a requirement of FHA, that all lenders making FHA-insured loans establish impound accounts for those loans.

The VA does not require lenders to maintain escrow accounts on VA-guaranteed home mortgages. However, the VA does require that lenders ensure that the property is covered by sufficient hazard insurance at all times and that property taxes are paid. So, most lenders use escrow accounts to ensure compliance with this requirement.

Why Is a Mortgage Impound Account Necessary?

Many lenders require that you pay your taxes and insurance through an impound account, so they can make sure that the bill gets paid. Your mortgage servicer will manage the impound account and pay these bills on your behalf. In some cases, an impound account may also be required by law.

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If your loan doesn't include an impound account, you will have to plan to pay these large expenses yourself. Be sure you budget for these extra costs and stay current on your taxes and insurance payments. If you fail to pay your property taxes, your state or local government may impose fines and penalties or place a tax lien on your home. You could also face foreclosure.

Even if your lender does not require an impound account, consider requesting one voluntarily. Having an impound account makes it easier to budget for your large property-related bills by paying small amounts with each mortgage payment. That way you don't have to scramble to pay a large property tax bill or insurance premium when it comes due.

How Monthly Mortgage Impound Works

Your lender will establish, and set up your impound account which includes a portion of the cost owed for current property taxes, as well as the first year of homeowner's insurance premium, to be paid at the time of closing.

A purchase transaction requires the first year’s insurance premium to be paid in advance at the time of closing. You will also be required to have a 2-months reserve to be deposited into the impound account.

For a refinance, there must be 4-months remaining on the existing hazard insurance policy. If there is less, you will be required to pay a full year’s premium at the close of escrow, plus 2-months reserve to be deposited into the impound account

It's important to note that under the rules of HUD (the US Department of Housing and Urban Development), your lender can only hold up to excess of two months of payments, and should not ask you for extra payments as "cushion" beyond that limit.

Canceling a Mortgage Impound Account

There are instances when a lender allows borrowers to cancel their impound account altogether. In these cases, homeowners typically need to meet specific qualifications, such as having at least 20% in home equity and having made all of their payments on time for at least one year.

You may be wondering why some people would want to cancel their impound account. Some saving-savvy homeowners prefer to to control where their savings are placed - for example, into an account that earns back interest. Others simply prefer to make payments in a one-time lump sum.

If you plan to cancel, you'll first need to talk to your lender to see if it's allowed under your mortgage agreement.

Mortgage impound accounts were designed to make mortgage payments easier to manage. By understanding the purpose of these accounts - as well as how they serve to protect borrowers - it's clear why many lenders include these requirements into their mortgage agreements.