What Is an Escrow or Impound Account?

What Is an Escrow or Impound Account

Table of contents

The home buying process can be a complicated journey as there are numerous steps to go through. You need to obtain a pre-approval through a lender, hire a realtor, find a home, make an offer to buy, go through the underwriting process, have the home inspected, close on the home, etc. The list seems endless with many steps in between the simple ones mentioned. And sometimes, the jargon sounds foreign. One of these foreign-sounding things on the home buying to-do list is the escrow or impound account. If you’re wondering what that is and why you might want one, continue on. We’re breaking down the question of what is an escrow account and will help you decide if you need one or not.

Key takeaways

  • An escrow or impound account is a savings account held by your mortgage lender to pay property taxes and home insurance.
  • Setting up an escrow account is not always mandatory, but most homeowners and lenders prefer it to ensure timely payments.
  • Your lender will monitor the account and adjust your monthly payment to reflect changes in insurance premiums and tax amounts.
  • If you overpay, you’ll receive a refund, but if you underpay, you’ll be required to pay the difference.
  • If you’re not sure whether you need an escrow account, it’s recommended to ask your lender for one.


What is an Escrow Impound Account


Escrow account in mortgage

During the closing of a home sale, a standard part of the closing paperwork includes creating an escrow account. But what is it in a mortgage setting? The lender often sets up this account wherein the money comes from a portion of your monthly mortgage payment. The purpose of this account is to create regular monthly payments alongside your mortgage to pay related expenses such as your property taxes or home insurance.


How does this account work?

An impound account doesn’t cost anything and the setup is done during the closing of a house sale. How it works is that the fees associated with property taxes and insurance are broken up into monthly payments and paid alongside your mortgage payment out of this account. It is essentially a savings account held in interest by your lender to pay insurance fees and property taxes as they come due. You make one payment to your lender each month and they take the mortgage portion out while depositing the difference into a specially designated account.


Do I need an escrow or impound account?

Setting up an escrow or an impound account is not always mandatory, but most homeowners and lenders prefer it. Some lenders do require the use of an escrow account, but not all. It is a good safeguard to ensure that all taxes and insurance fees are paid in a timely manner. If you decide against using such an account and your lender doesn’t mandate that one be used, you may have to pay a small fee not to use escrow. Keep in mind that this also means you are responsible for paying property taxes and insurance on your own, which can mean larger payments when they’re due, as opposed to paying a smaller amount over 12 months.


What if my loan doesn’t include an escrow account?

If your lender does not have an escrow impound account in place or doesn’t require it, you may request one. This is a good idea for both budgeting convenience and assurance that appropriate fees are paid. If forgoing an escrow impound account, be sure to account for these expenses in your budget. If you neglect to pay property taxes, you may be subject to fines and penalties, have a lien put on your home, or even face foreclosure.


Setting up an escrow or impound account

The account is set up and managed by your mortgage company. While shopping for your loan, be sure to tell your lender that you prefer an impound account for taxes and insurance. Some lenders may require this. After receiving your loan documents, the lender will include instructions to the settlement company on what the escrow company will put into the account. The necessary amount is calculated by taking the amount due for both property taxes and homeowners insurance over the year and dividing it by twelve.


Monitoring the account

Your lender will complete an analysis each year to target any changes in insurance premiums and tax amounts as these can change yearly. Your monthly payment could go up or down to reflect these fluctuations. If the amount owed goes over what the analyst figured, you will have to pay the extra amount owed. If it doesn’t reach the amount given, you will receive a refund.


Key takeaways

  • Depending on key factors such as income, debt, and credit score, you may be required by a mortgage lender to set up an escrow impound account.
  • Even if you are not required to have an escrow impound, it is a good idea to request one.
  • An escrow impound account ensures that taxes and insurance on your property are paid in a timely manner.
  • If you overpay into the escrow account, you will receive a refund. If you underpay, you will be required to pay the difference.

As a homeowner, you will notice that extra expenses that arise throughout the year are associated with home upkeep and emergency repairs. Unless you’re prepared to anticipate thoroughly, budget, and forecast payments for both property taxes and insurance every year, an escrow impound is extremely beneficial. If you are not required to have one, it is recommended to ask one from your lender.


Reach out to us today!

If you are just starting your home buying journey, contact the experts at Hero Home Programs™. They will get you started with the right lender and other home-buying experts. They have spent countless hours cultivating relationships with key service providers to offer their clients discounted options. They work hard to find grants, rebates, and assistance in your local area to potentially save you thousands of dollars on your home purchase. Get started today with a free consultation.

Picture of Jacquelyn Sublett
Jacquelyn Sublett

I love teaching and writing on real estate, finance and mortgage topics. I find it fulfilling hearing stories of first time home buyers who we have helped with the home buying process. Writer for the Hero Homebuyer Programs™

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