The pros and cons of an escrow impound account
An escrow impound account is a trust account held by the lender of your new loan to facilitate the collection and payment of your property taxes and/or home owners insurance. If you elect to have an escrow impound account, you simply pay 1/12 of your annual property taxes and 1/12 of your annual homeowners insurance in addition to your regular required mortgage payment every month. Impound accounts are not generally required unless you have less than 10% equity in your home.
Why would you want (or not want) an escrow impound account? Let’s look at some of the pros and cons:
- Generally you get a reduction in closing costs for establishing the account
- There are no fees or service charges for the account
- The lender is responsible for the timely payment of your taxes and insurance
- No additional budgeting is required to insure that you have adequate funds to pay the large bills when they are due
- Taxes are due right before Christmas and then tax season; who wants to have to cut multi-thousand dollar check in those months?
- The County Tax Assessor charges a 10% penalty for late taxes, the lender will be responsible for this if they are late
- Never suffer a lapse in insurance because you forgot to pay the bills
- You do not earn interest on the balance of the account
- When the account is first established, 2-8 months of property taxes may be required to be placed in the account (depending on the time of the year)
Perhaps I’m a little biased, but I believe the pros seem to outweigh the cons. A few other things to note:
- The impound account can usually be canceled at any time.
- The accounts are under trust regulation so the accounting is spot on.
- They just make life a little easier.
Lenders want you to have an impound account. In the event of a foreclosure, they are generally past due taxes and a lapsed insurance policy, which add to the cost out of pocket for that lender when they foreclose.
Lenders prefer you to have an account so they always know the status of those payments and can minimize losses when necessary, and reduce the amount of closing costs. For lenders, an escrow impound account is incentive for your participation.