Mortgage impound accounts for taxes and insurance

November 07th, 2011

Impound or escrow accounts hold funds deposited with your lender to pay property tax and homeowner's insurance payments. This makes your loan less risky for your lender because it can be sure the that your property will be insured and free of property tax liens. Many homeowners pay into their impound account as part of their monthly mortgage payment. When taxes or insurance premiums are due, the lender simply sends in the required funds from the impound account.

However, depending on when your purchase or refinance mortgage transaction is closing, you may be somewhat stunned at the amount of money your lender needs to collect in the impound account. Use a free online mortgage calculator to estimate your impound costs at closing.

Insurance premiums

The first year's insurance premium plus two months' reserves are generally collected at closing. The lender pays the insurance for the year, and the two-month cushion makes sure there is enough in the account when premiums are due next year.

Property taxes

The amount collected at closing for tax reserves also depends on your first mortgage payment due date and how taxes are collected in your county. Most jurisdictions accept semi-annual or quarterly payments; check with your local property tax authority or lender about your requirements. Keep in mind that when you purchase a home, the seller may have prepaid property taxes; these are prorated and returned to him or her by you.

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Monthly Payment

Additional notes

  • Most lenders charge an additional fee if you elect not to have an impound account, and most don't allow you to opt out unless you have at least 20% home equity or down payment. For FHA and VA mortgages, there is no choice; impounds are simply required.
  • If you have an impound with your current lender and want to refinance, you will likely have to fund a new impound account for taxes and insurance for the new lender and get a refund on any balance held by your current lender (they have to return your money within 30 days).

When using a free online mortgage calculator to calculate closing costs for your purchase or refinance mortgage transaction, note that most of them do not consider impound accounts for taxes and insurance. To be safe in your calculations, add one full year's payment of both taxes and insurance to the funds you think you will need to close.

Posted By :

Dennis is co-owner and broker of record for Stratis Financial in Southern California. With over twenty years experience in the mortgage industry he has helped thousands families purchase homes. His Weekly Rate and Market Update keeps his clients and real estate professionals educated and informed on the mortgage industry and the economy. from Pitzer College and is married with two children.

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