Over the next 2 minutes, the following will save you time and money.

What is an Impound or Escrow Account?

An impound or an escrow account is simply an additional payment added into your monthly mortgage payment to cover the cost of property tax and can also include homeowner’s insurance. Having an impound is optional and can be set up with your loan service provider, however in the state of California, if you finance over 90% of the total value of your home, you are required to carry an impound account.

The Good

With a portion of your monthly payment being set aside in an escrow account to cover the cost of property taxes and homeowner’s insurance, your loan service provider will make the payments for you. If you over paid into the account, you will receive a refund check in the mail for the overage.

The Bad

If you happen to underpay into the escrow account for property tax and homeowner’s insurance, your loan service provider will provide you a few options to cover the extra cost. Those options might include:

Make an additional payment to cover the difference
Increase your monthly mortgage payment to cover the difference
Increase your monthly mortgage payment to cover the difference and future projected costs

The Ugly

If you just bought a home within the last year and your mortgage service provider sent you a large check for excess funds left over in your impound account along with a letter stating they are going to drop your monthly payment…BEWARE. Odds are the next time they pay your tax bill they won’t have sufficient funds in this account. Then they will increase your monthly payment to make sure they are gathering enough funds to cover your future tax bills when due AND they will require a large lump sum payment to pay back the portion of the tax bill your impound account didn’t cover. Of note, the lump sum can be paid by a payment plan over the next couple years, but this could equal hundreds of dollars in increased monthly payment on your mortgage.

Final Thoughts

Everyone has their opinion on impounds. I personally am an advocate as they are one less financial item that needs to be managed – paying a large tax bill on a bi annual basis. If you receive a refund, or are required to make an increased payment to your service provider and you don’t know what to do, your mortgage professional can easily research the issue and provide options for the best course of action.

Please feel free to comment below or contact me directly with mortgage and real estate questions at sarah@crafthomeloans.com

About the Author – Sarah Lindsey is a mortgage professional with over 10 years of industry experience. Her core values are based on one simple approach – provide the client with trusted expertise, personalized information, specific to their needs. Sarah currently serves as a Vice President with Synergy One Lending, is a regular guest on the television show, The American Dream with Craig Sewing, and can be heard on the radio station AM1170 advocating consumer awareness.

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