What Is an Impound Account?
If you’ve been exploring what is involved in using a home loan, then you’ve probably already come across impound accounts. If you haven’t heard the term before, then you’ve just encountered them under a different name. An escrow account is sometimes called an impound account in certain parts of the country, according to California Title Company. Whichever name you prefer to use, this type of account is set up by your lender for a specific purpose.
What Is the Purpose of an Escrow Account?
As the Consumer Financial Protection Bureau explains, an escrow account is set up by your lender. It’s used to hold funds collected as part of your monthly mortgage payments. Your lender uses these funds to pay certain property-related expenses, like property taxes or insurance premiums when they come due.
Are Impound Accounts Required?
The rules governing escrow accounts vary by state. Lenders normally require borrowers who put down less than 20 percent to have impound accounts. Certain types of loans also require impound accounts. As Investopedia points out, many lenders will allow borrowers who have at least 20 percent equity and a loan that allows it to close the equity account and take responsibility for the payment of their own taxes and insurance. However, many borrowers are happy with the status quo. They are content to continue paying into the escrow account even when the lender no longer requires it because they can appreciate the benefits the arrangement offers.
Are There Benefits to Escrow Accounts?
As The Mortgage Reports makes clear, escrow accounts offer benefits for both lenders and borrowers. For lenders, there’s the comfort of knowing that their interests are protected. Collecting the funds for property taxes and insurance premiums ensures that these bills get paid. This eliminates the worry of the property being seized for failure to pay taxes. It also reduces the risk of a situation where the property is damaged and goes unrepaired because the owner lacks the resources because they allowed their insurance policy to lapse. What about homeowners? Tax bills and insurance premiums are large semi-annual or annual bills that can sneak up on you if you aren’t paying enough attention. Having an escrow account means that your lender collects a small amount of what’s needed to pay these bills each month, so you’re never hit with a surprise bill.
Are There Disadvantages to Escrow Accounts?
Some states require your lender to pay you interest on the money in your escrow account. Others don’t. If you live in one of the states where you lose out on the interest, that’s a clear disadvantage, according to Investopedia.
What Happens If There’s a Mistake?
Nothing is perfect. What happens if a mistake is made? The Mortgage Reports breaks it down: If you have an escrow account, and your lender fails to pay a bill, notify them. They must respond with a receipt of the error within five days and correct the error within 30 days. Any late charges or penalties resulting from their error are their responsibility. If you don’t have an escrow account and fall into arrears with a property tax bill or insurance bill, you are responsible for correcting things. However, if the situation is out of hand, your mortgage company may step in to pay the necessary amounts and add them to your balance. If they do, they’ll likely declare you in breach of your waiver of an escrow account and require you to set up a new escrow account to protect their investment.
Are you interested in learning more about home loans? Is refinancing in your future? Reach out to PrimeLending Dallas. Helping you find the best way to reach for your housing goals would be our pleasure. Contact us today to get started.