What Is an Impound Account and How Does It Work?

Impound accounts, also known as escrow accounts, help homeowners manage homeownership expenses by covering costs like property taxes and insurance.

Purpose in Mortgage Payments

Impound accounts streamline mortgage payments by consolidating property-related expenses into one monthly payment. This simplifies budgeting for homeowners, avoids multiple due dates, and ensures timely payments, which protects creditworthiness. For lenders, these accounts reduce default risk by collecting funds in advance for taxes and insurance, safeguarding their collateral. The Consumer Financial Protection Bureau (CFPB) provides guidelines to ensure transparency and fairness in the management of these accounts.

Required vs Optional

The necessity of an impound account depends on factors such as loan type, borrower credit, and lender policies. Government-backed loans, like those from the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), typically require impound accounts to ensure timely payment of property-related expenses. For conventional loans, requirements often hinge on the loan-to-value (LTV) ratio. Borrowers with less than 20% down may be required to have an impound account to mitigate lender risk. Those with strong credit and substantial equity may have the option to manage payments independently, though this demands disciplined budgeting.

Items Typically Covered

Impound accounts generally cover recurring homeownership expenses, including property taxes, homeowners insurance, and private mortgage insurance (PMI).

Property Taxes

Property taxes, calculated as a percentage of a property’s assessed value, fund services such as education and infrastructure. Impound accounts collect a portion of the estimated annual tax bill monthly, preventing large lump-sum payments. Tax rates vary by jurisdiction, so homeowners should understand local tax codes, exemptions, and appeal options if they believe their property is overvalued.

Homeowners Insurance

Homeowners insurance protects against damage or loss from events like fire or theft. Premiums depend on factors such as the home’s value and location. Impound accounts ensure policies remain active by collecting monthly installments. Homeowners should regularly review their coverage and be aware of potential premium increases due to claims or changes in risk factors.

Private Mortgage Insurance

Private Mortgage Insurance (PMI) is required for borrowers with a down payment of less than 20% on conventional loans, protecting the lender in case of default. Impound accounts facilitate monthly PMI payments. Homeowners should monitor their equity levels, as reaching 20% equity may allow them to request PMI cancellation, potentially lowering their monthly payments.

Calculation and Adjustments

Lenders estimate annual property tax and insurance costs, dividing the total by 12 to determine monthly contributions. The Real Estate Settlement Procedures Act (RESPA) permits lenders to collect a cushion of up to two months’ expenses. Annual escrow analysis ensures sufficient funds, with adjustments made for any surpluses or shortages.

Surpluses and Shortages

Impound accounts can experience surpluses or shortages due to fluctuations in expenses. A surplus occurs when collected funds exceed actual costs, often due to reduced taxes or insurance premiums. Under RESPA, surpluses over $50 must be refunded to homeowners. Shortages arise when funds are insufficient, often due to increased expenses. Homeowners can address shortages by paying the deficit as a lump sum or spreading it over 12 months. Staying informed about changes in tax assessments or insurance rates can help homeowners anticipate adjustments and avoid shortfalls.