During the home buying process you may hear your lender or agent refer to an impound or escrow account and wonder what they are. They’re the same thing and refer to an account that’s set up and tied to your mortgage to pay your property taxes and/or homeowners insurance.
With FHA, VA, USDA, and conventional loans with less than 20 percent down, you’re required to have a property tax and homeowners insurance impound/escrow account; some banks may also require rental properties to have it too. If you put at least 20 percent down you won’t be required to have an impound/escrow account but talk to your lender; in some cases you may get a better interest rate having one.
Depending on the month there will be a certain amount of money collected to start the impound/escrow account and will be part of your closing costs. These costs can be high but are not fees; you’re pre-paying expenses that are part of homeownership. Generally 2 months of your homeowners insurance is collected and up to 9 months of your property taxes (October closings require this). The account is tied to your mortgage so if you refinance and want an impound/escrow account with your new mortgage the money in your current account can’t be switched over to the new mortgage. You’re going to have to pay the costs of starting a new impound/escrow account and once your old mortgage is paid off you’ll get a refund of whatever is in your old impound/escrow account.
If you choose to or are required to have an impound/escrow account 1/12 of your property taxes and 1/12 of your homeowners insurance premium are added to your mortgage payment.
Here’s an example on a VA loan with impounds (annual property taxes are $5000 and annual homeowners insurance policy is $650):
$1700 principle and interest payment
$54.17 homeowners insurance
$416.67 property taxes
$2170.84 total payment (that’s the amount you’ll be writing your monthly mortgage payment for)
Every month that you make your payment the property tax and homeowners insurance parts of your payment go into the impound/escrow account. When your property taxes and homeowners insurance are due, the mortgage servicer gets a copy of the bills (except a supplemental tax bill) and pays them from your account; you don’t have to worry about them.
My advice is that if you’re a first time homebuyer and aren’t required to have an impound/escrow account, that you do still get one until you’re comfortable with the costs associated with owning a home; for more seasoned buyers it’s strictly a personal choice.
Michael Regan (NMLS #275695) is a mortgage banker who specializes in Marin, Sonoma, and Napa counties. You can reach him at 415-672-2499 or 707-508-8473 for all your financing needs.