by Dian Hymer
Have you ever had a property tax bill to pay and not enough cash to pay it? If so, you might be a candidate for an impound account.
An impound account (also called a reserve or escrow account) is a special bank account. It's set up by the lender to collect money from the borrower to pay future property tax and insurance bills.
A lender can require that you have an impound account on an owner-occupied mortgage if the loan amount is for 90 percent or more of the purchase price. However, not all lenders require impound accounts on these loans. On non-owner occupied mortgages for investment properties, the lender can require an impound account even if the loan amount is less than 90 percent of the purchase price.
One way to avoid an impound account on an owner-occupied 90 percent mortgage is to raise your down payment amount slightly. The amount necessary to avoid an impound account will vary with the lender, but it can be as little as an additional $100.
Lenders who require impound accounts must disclose to borrowers how the impound account works. The lender is entitled to collect funds from borrowers based on their projected property taxes and insurance bills. An advance is usually collected at closing in order to fund the impound account. Check to make sure how much this will be so you're not caught short of cash at closing.
After closing, funds to cover future property tax and insurance bills are collected from the borrower, usually on a monthly basis. The borrower receives interest on the money in the account. The lender pays the property tax and insurance bills when they come due.
One advantage of having an impound account is that you participate in a forced savings plan. This can benefit people who either have a hard time budgeting or who are on a tight budget. For investors, impound accounts are useful for accounting purposes.
A disadvantage of an impound account is that you can probably earn a better interest rate on your money by investing on your own. Also, you don't have the use of the money that's accumulating in your impound account.
An impound account can usually be dropped on an owner-occupied loan once you have 20 percent equity in the property. Also, your payments will have to be current and you'll need a good record of making payments on time. Contract your lender if you meet these requirements and want to drop your impound account.
Anyone can request an impound account, even if your lender doesn't require one. Your closing loan documents should include a form on which you can indicate whether or not you want an impound account. If you decide, after closing, that you want an impound account, contact your lender. There should be no charge for setting up an impound account.
First Time Tip: Just because you have an impound account doesn't mean you can relinquish responsibility for paying your property taxes and insurance bills.
Lenders sometimes make mistakes. Check the statements you receive from your lender to confirm that your bills are being paid on time. The lender should be responsible for penalties if the lender makes an error and your property taxes or insurance bills aren't paid on time.
The Closing: Loans are frequently sold. The loan servicing may or may not be sold with the loan. If the servicing is sold to a new company, make sure the new company has an accurate record of your impound account balance.
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