YARDLEY, PA, Oct 09, 2015—There are dozens of terms that are important to learn when you're a homeowner. One in particular is the ever elusive “impound account.”
“This is a special bank account held by the lender to collect monthly payments from the borrower to pay property taxes, mortgage insurance, and hazard insurance,” explains Wes Foster, Founder & CEO of Long & Foster Real Estate. Some of us may know the term by one of its other monikers; these accounts also are called escrow or reserve accounts.
“Lenders like to set up impound accounts to ensure the property taxes and insurance will be paid on time,” says Foster. They typically also collect a two-month cushion for taxes and insurance at the closing. A few states require the lender to pay interest on funds held in these accounts.
Impound accounts can typically be waived on a conventional loan if the loan amount is 80 percent or less of the purchase price. “However,” stresses Foster, “the lender might charge you an additional 1/4 point for this option to waive the escrow.”
One way to avoid an impound account on an owner-occupied mortgage is to raise your down payment amount slightly. The exact amount necessary to avoid the escrow will vary with the lender.
“In some states, lenders let buyers set up separate accounts in which they place specific funds and then pay the insurance and property taxes themselves,” says Foster. These are called pledge accounts, and they must be set up before you close on the home.
An impound account can usually be dropped on an owner-occupied loan once the loan-to-value ratio equals 80 percent or less. But restrictions apply: payments will have to be current and your record of making on-time payments pretty solid. Contact your lender if you meet these requirements and want to drop your impound account.
For more information on understanding your mortgage, please contact Long & Foster Real Estate at firstname.lastname@example.org, 1-877-221-1776, or Long & Foster Real Estate.