Impound Account

An impound account is a fund set aside by a lender for the future payment of various required expenses like property taxes and insurance premiums. These accounts are typically used in mortgage agreements.
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Impound Account

An impound account, also known as an escrow account, is a savings account set up by a mortgage lender to pay property taxes and insurance premiums on behalf of the borrower. Borrowers make monthly payments into the account along with their mortgage payment, and the lender disburses these funds when the taxes or insurance premiums are due. This ensures timely payments and can prevent borrowers from falling behind on these obligations.

Examples

  1. Mortgage Impound Account: A common example is when a homeowner pays their lender a combined amount covering their mortgage, property taxes, and homeowner’s insurance. The lender then pays these bills on the homeowner’s behalf.
  2. Auto Loan Impound Account: Similar to mortgages, some auto loans set up impound accounts for insurance payments.
  3. Pooled Reserve Fund: Some homeowner associations use impound accounts to collect and manage funds for common area maintenance and repairs.

Frequently Asked Questions

Q1: Why do lenders require an impound account? A1: Lenders require impound accounts to ensure that property taxes and insurance premiums are paid on time, protecting their interest in the property and avoiding lapses in coverage or liens.

Q2: Can a borrower opt out of having an impound account? A2: Depending on the lender and the specific loan terms, some borrowers may have the option to waive the impound account requirement if they meet certain conditions, like a higher down payment.

Q3: How is the amount to be deposited into the impound account determined? A3: The lender estimates the annual tax and insurance obligation and divides this amount by 12 months to calculate the monthly deposit.

Q4: What happens if the impound account has a surplus at year-end? A4: If there’s a surplus in the impound account at the end of the year, the lender will typically offer escrow balance reconciliation and either refund the excess amount to the borrower or apply it to future payments.

Q5: Is the contribution to an impound account tax-deductible? A5: Contributions to the impound account itself are not tax-deductible. However, the property taxes and mortgage interest paid using the account can be deductible, depending on the tax laws.

  • Escrow Account: An account held by a third party on behalf of two other parties, where funds deposited are held in trust until they are needed for specific purposes, such as the payment of taxes and insurance.
  • Reserve Fund: A savings account used by homeowners or homeowners associations to save money for future expenses or emergencies, different from an escrow account used specifically for regular tax and insurance payments.

Online References

Suggested Books for Further Studies

  1. The Mortgage Professional’s Handbook: Succeeding in the New World of Mortgage Finance by Jess Lederman
  2. Home Buying Kit For Dummies by Eric Tyson and Ray Brown
  3. The Book on Managing Rental Properties by Brandon and Heather Turner

Fundamentals of Impound Account: Mortgage Basics Quiz

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