May 11th, 2018 4:49 AM by Jackie A. Graves, President
Did you think that when you stopped renting and started owning
your, you'd finally be done with deposits? Think again. When you buy a
residence with a down payment of less than 20%, your lender may require you to
make a deposit on your homeowners insurance, private mortgage
insurance, any required additional insurance (like flood insurance) and your
An impound account (also called an escrow account,
depending on where you live) is simply an account maintained by the mortgage
company to collect insurance and tax payments that are necessary for you to
keep your home, but are not technically part of the mortgage. The lender
divides the annual cost of each type of insurance into a monthly amount and
adds it to your mortgage payment.
who make low down payments are considered to be a higher risk (smaller down
payment equals less personal stake in the property; plus, they often have less income, as well), lenders
want some level of assurance that the state will not foreclose because of non-payment of property taxes, and
that borrowers won't be without homeowners insurance in the event that the
property is damaged. An impound account ensures that the only person who will
become owner of the house in case of default will be the lender.
Even if an
impound account is not required, one can be elected at the loan signing. But is
that a good idea?
On the down
side, it's locking up money that might be better used elsewhere. Not all states
require lenders to pay interest on the funds held in impound accounts, and
those that do may not pay as much as individuals could earn by investing the
money on their own. Not surprisingly, some consumers would rather set
money aside in a high-interest savings account, or some other investment.
Further, if the mortgage
company does not pay bills – like property taxes and homeowners
insurance – when they are due, the homeowner will still be on
the hook. Therefore, homeowners should be aware of the due dates for these
payments and monitor their impound accounts carefully.
On the other
hand: Although the impound account is designed to protect the lender, it can
also be beneficial for the borrower. By paying for big-ticket housing expenses
gradually throughout the year, borrowers avoid the sticker shock of paying
large bills once or twice a year and are assured that the money to pay
those bills will be there when they need it.
Your monthly mortgage statement will probably show the balance in your
impound account, making it easy for you to keep a close eye on it. Federal
regulations also help borrowers out in this area by requiring lenders to review
borrowers' impound accounts annually to ensure that the correct amount of money
is being collected. If too little is being collected, the lender will start
asking you for more; if too much money is accumulating in the account, the
excess funds are legally required to be refunded to the borrower.
The cash amount
that fixed-rate borrowers
think of as their monthly payment is still subject to change – this is one of
the biggest issues with impound accounts. Since homeowners insurance and
property taxes can vary, monthly payment amounts can fluctuate, affecting
monthly cash flow with little
(Read "Understanding the Mortgage Payment Structure" for more
impound accounts also decrease the amount of money borrowers can place in an emergency fund.
The lender keeps a little extra in your impound account, in order to ensure the
extra cushion needed in order to keep making insurance and tax payments if you
stop making your monthly mortgage payments. This cushion is collected when you
acquire the loan. Thus, the startup costs associated with impound accounts can
increase the amount of cash buyers need in order to purchase a residence in the
need to maintain impound accounts forever, though. Once sufficient equity (often 20%) in the residence is achieved, lenders
can often be convinced to ditch the impound account.
homeowners, mortgage impounds are a necessary evil. Without them, lenders might
not be willing to give mortgages to borrowers who can afford only low down payments. The
best way to deal with impound accounts is to understand how they work, monitor
them carefully – and get rid of them when you can.
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