Your escrow account – to impound or not to impound?

In addition to paying the principal and interest on your mortgage, you are also responsible for paying property taxes and homeowners insurance. In some cases, you may also pay mortgage insurance (PMI or MIP) and/or HOA dues – but we will save mortgage insurance and HOA dues for another conversation.

Property taxes are typically due twice per year, payable to the county.
Homeowners insurance premiums are typically due annually, payable to your insurance company.

When purchasing or refinancing a home, you may have the option to either:

Impound taxes and insurance. If you choose to establish an impound account, your property taxes and homeowners insurance are divided into monthly installments, added to your mortgage payment, and collected by your mortgage loan servicer. The servicer holds these funds in your impound account until the payments are due, sending them directly to the county (for property taxes) and your insurance company (for homeowners insurance).

-or-

Not impound taxes and insurance. If you choose not to impound (also called waiving an impound account), your monthly mortgage payment will consist only of principal and interest. As the homeowner, you will be responsible for paying property taxes and homeowners insurance bills in full when they come due.

Example scenario

Annual property taxes: $9,000/year
Annual homeowners insurance premium: $1,800/year
Principal & interest payment: $2,500/month

With an impound account: Your monthly mortgage payment will include:

1/12th of property taxes: $750/month
1/12th of insurance premium: $150/month
Principal & interest payment: $2,500/month

Your monthly payment will be $3,400/mo. Your loan servicer will use the funds in your impound account to pay the property tax and insurance bills when they are due.

Without an impound account: Your monthly payment will be $2,500/mo, consisting only of principal and interest. You will be responsible for budgeting for and paying the property tax and insurance bills directly.

Factors to consider

Your decision to impound property taxes and insurance depends on personal preference. Here are three key factors to consider:

1. Convenience

With an impound account: Taxes and insurance are included in your monthly payment, eliminating the need to track due dates or budget separately. This simplifies your finances with one payment to your loan servicer.

Without an impound account: You must track and budget for taxes and insurance on your own.

2. Consistency in monthly payments

With an impound account: Your monthly payment may change if property taxes or insurance premiums increase. For example, under CA Prop 13, property taxes can increase by up to 2% annually, and any assessments or bond measures voted in may further impact your taxes. Similarly, insurance premiums often rise over time. If your impound account becomes underfunded, your loan servicer may adjust your monthly payment or require a lump sum to cover the shortage.

Without an impound account: Your mortgage payment will never change (if you have a fixed-rate loan). Any increases in property taxes or insurance are paid separately and do not affect your monthly mortgage payment. This option may suit you if you prefer a consistent monthly payment, but it requires separate budgeting for taxes and insurance.

3. Funds required to close

With an impound account: Your prepaid costs due at closing will increase because your impound account needs to be funded in advance to account for future property tax and insurance bills. Depending on the time of year, this could require 3–12 months of property taxes and 3-12 extra months of homeowners insurance to be prepaid.

Using the figures in the example scenario above, this could increase your prepaid costs by anywhere between $2,700–$9,900 depending on the closing month and whether you are purchasing or refinancing.
If you are purchasing a home, this increases the total funds you need to bring to closing.
If you are refinancing, this amount may be added to your new loan balance (most common) or paid out of pocket at closing.

Without an impound account: These expenses are not prepaid at closing. Instead, you will pay them directly when they are due.

Summary

Waiving an impound account doesn’t save you money, but it allows you to delay paying property taxes and insurance until they are due instead of prepaying them at closing. Conversely, establishing an impound account offers convenience and simplifies budgeting by including these costs in your monthly mortgage payment, but it requires more funds upfront and may lead to fluctuating payments over time. If you value convenience, impounding may be the better choice. If you prefer consistent monthly payments or lower closing expenses, not impounding could be a better fit. In conclusion, there is no “right” or “wrong” way to go about impounding – it truly comes down to your personal preference!

If you are interested in getting pre-approved to purchase a home or you’d like to refinance your existing mortgage, you may complete our user-friendly online application here. Not quite ready to apply, but want to chat through your situation and options? No problem! Click here to schedule a free 15-minute call with our broker/owner, Dan Patty or email us at TeamDan@solcostahomeloans.com. We are here for you whenever you are ready!