Escrow Impounds (aka Escrow Reserves)
An escrow impound account is an account that can be set up at the closing of your new home loan where the lender will pay your future property taxes and homeowner’s insurance on your behalf. Each month within your payment, 1/12th of the annual property taxes and 1/12th of your homeowner’s insurance will be collected and placed in your escrow impounds account. This account is set up at the loan closing and is designed to make sure that your property taxes are always paid on time and your insurance is always current.
Some people prefer to have the lender collect this monthly and handle the payments to the County and Insurance Agent for them. Others prefer to manage the savings and payments themselves. With less than 20% down, you have the choice. With some lenders there is generally a slight one-time cost to waive the impound account. They prefer to manage it for the borrower’s.
Prepaids due at closing
All lenders will require that the homeowner’s insurance premium for the first year is paid at closing on a purchase. They want to make sure that their collateral is protected. If insurance is part of the escrow impounds thereafter, generally 1-2 months will be collected to start the account. With a refinance, if the premium is due near closing, they may require the premium be paid in advance at closing. Again, they are protecting their asset.
With Property Taxes, the amount required to start the impound account depends on the month the loan closes. This will be estimated at the start of the loan process. The lender will provide the final figure right before closing.
When the escrow impound account is first set up, a deposit of 2-6 months’ worth of property tax and/or insurance payments is placed into the account. This is known as the escrow impound deposit. They generally pad the account by one month of each to ensure there are sufficient funds to pay the property taxes and insurance in full when they become due. Because property taxes can be adjusted annually, and insurance rates also change, it is important to have a pad in the account to ensure there is not a shortfall and therefore a lapse in insurance coverage or a delinquency in property taxes.
Your lender will send a notification (generally once per year) to let you know the status of your impound account and if any additional funds are needed from increases in taxes or insurance. This is common and should be expected.
Again, some prefer to have this budgeted in with their monthly payment and some prefer to handle it on their own.