You’re there – you’ve done it! Your offer has been accepted, and now that you’re going through the loan process, the concept of an escrow/impound account will be brought up (not to be confused with escrow, which means the company that is a 3rd neutral party who coordinates the closing of a real estate transaction).
An escrow/impound account is set up by your mortgage lender to pay certain recurring property-related expenses on your behalf after closing. This includes taxes, homeowner’s insurance, and mortgage insurance, if required. Many homeowners prefer to pay these expenses into an account on a monthly basis, along with their mortgage, to avoid paying these large installments once or twice a year. Some loan types require escrow/impound accounts, such as FHA or VA loans, or conventional loans when the buyer puts less than 20% down. If the loan type doesn’t have any specific requirements for an escrow/impound account, it is the buyer’s personal choice. What are the benefits of an impound account?
Budget-friendlyAn impound account budgets your tax and insurance expenses on a monthly basis. This breaks the usually large amount owed into smaller, more manageable payments that you know are always accounted for within your budget. An impound account can be thought of as simply a savings account that estimates the amount due and pays the taxes and home insurance once the due date rolls around.
IncentivesLenders will also incentivize buyers to use an impound account by having better fees on home loans, since an impound account ensures the lender that these expenses will be paid timely and the property will not be at risk. Lenders typically charge 10-25 basis points less in fees for a loan when the buyer has an escrow/impound account, which is $400-$1,000 in cost on a $400,000 loan.
ConvenienceFinally, an impound account allows the borrower the peace of mind that their taxes and insurance will be paid on time and there are no surprises of a large tax or insurance bill once or twice a year.
It’s important for buyers to understand that by utilizing an escrow/impound account, you will never pay a penny more or a penny less for your taxes or home insurance. By law, impound accounts are reviewed annually to make sure that too much isn’t being taken out for these expenses.
By understanding exactly how escrow/impound accounts work, home buyers will be better informed and make the best decision. Having a highly experienced lender and a top real estate professional is the best combination to help you navigate the entire home buying process.
If you’d like to meet with highly experienced lenders and top real estate agents to help you with the process, contact the Inspira team today!