Impound accounts explained

Mortgage Impound Accounts Explained: Escrows and Impounds

When you get a home loan, you may be given—or required to use—an impound account to pay your property taxes and homeowners insurance.

Depending on where you live and who you’re talking to, you may also hear these accounts called escrow accounts, impounds or trust accounts. Different names, but essentially the same concept: part of your monthly mortgage payment is set aside so your mortgage servicer can pay certain property-related bills when they come due.

Is that a good thing?  For many homeowners, absolutely. For others, they would rather keep control of their own money and pay the bills themselves.  The better choice largely depends on how you manage your money—and whether your particular loan gives you a choice.

What Is a Mortgage Impound or Escrow Account?

An impound account is essentially a separate account maintained by your mortgage servicer to collect money for certain expenses associated with your home.

Your monthly mortgage payment may therefore include:

The property-tax and homeowners-insurance portions are collected each month and held until those bills become due. The mortgage servicer then pays the bills from the account on your behalf. This is why you'll sometimes hear a mortgage payment described as PITI: Principal, Interest, Taxes and Insurance.

A Simple Example

Suppose your annual property taxes are $7,200 and your homeowners insurance costs $1,800 per year.  That means approximately:

$7,200 ÷ 12 = $600 per month for property taxes

$1,800 ÷ 12 = $150 per month for homeowners insurance

Your mortgage servicer would collect approximately $750 per month in addition to your principal and interest payment and place that money into your impound account.

When your tax and insurance bills come due, the servicer pays them from the funds that have been accumulated.  Keep in mind that actual escrow calculations can be more complicated because servicers maintain a permitted cushion and periodically adjust the amount collected.

Why Do Mortgage Lenders Like Impound Accounts?

From the lender's perspective, impound accounts help protect the property securing the mortgage.  If property taxes aren't paid, the taxing authority may have rights or liens against the property. If homeowners insurance lapses and the property suffers major damage, the lender's collateral could be at risk.

Collecting taxes and insurance monthly helps reduce those risks.  It also converts large, infrequent bills into smaller monthly amounts, which can make budgeting much easier for homeowners.

Why You Might LOVE Having an Impound Account

The biggest advantage is convenience.

Instead of worrying about large property-tax and insurance bills throughout the year, you're putting aside money every month as part of your mortgage payment.

When the bills arrive, your servicer generally takes care of paying them.

This can be especially helpful for homeowners who prefer predictable monthly budgeting rather than setting aside money independently.

Think of it as a forced savings plan for your property taxes and insurance.

If you don't want to worry about remembering tax deadlines—or suddenly finding several thousand dollars to pay a tax bill—an impound account can make life considerably easier.

Why You Might HATE Having an Impound Account

The biggest downside is control—or lack of it.

Instead of keeping your tax and insurance money in your own bank or investment account until the bills become due, you're sending that money to your mortgage servicer every month.  Some homeowners would rather manage those funds themselves.

There is another issue that sometimes surprises homeowners: your monthly mortgage payment can change even when you have a fixed-rate mortgage.

Your principal and interest payment may remain fixed, but your property taxes and homeowners insurance can increase.  If those expenses go up, the amount your mortgage servicer needs to collect for your impound account may also go up.  That can cause your total monthly mortgage payment to increase.

What Is an Escrow Analysis?

Mortgage servicers periodically review escrow accounts to determine whether enough money is being collected to pay upcoming property-tax and insurance bills.

This is generally called an escrow analysis.

If taxes or insurance have increased, the analysis could determine that the account has a shortage.  Your servicer may then increase the monthly escrow portion of your mortgage payment to cover anticipated future bills and, depending on the circumstances, recover an existing shortage.

This is one reason homeowners sometimes receive a notice saying their mortgage payment is increasing even though they have a fixed interest rate.

The mortgage rate didn't change. The taxes, insurance or escrow requirements did.

Can You Choose NOT to Have an Impound Account?

Sometimes.

Whether you can waive an impound account depends on several factors, including the type of mortgage, loan-to-value ratio, lender or investor requirements, and applicable laws and regulations.

Some loan programs or circumstances may require an escrow account, while other borrowers may be permitted to pay their property taxes and homeowners insurance directly.  There can also be pricing, fees or other conditions associated with waiving an escrow account.

This is something worth discussing with your loan officer before choosing your loan structure, rather than discovering the requirement after the loan is already in process.

If You Don't Have an Impound Account

You are responsible for making sure the bills are paid correctly and on time.

That sounds obvious, but property taxes can represent a substantial amount of money.

For example, if your combined tax and insurance expenses equal $10,800 annually, you should think of that as approximately:

$10,800 ÷ 12 = $900 per month

Even though you aren't sending that $900 to your mortgage company every month, the expense still exists.  A disciplined homeowner might automatically transfer $900 each month into a dedicated savings account. Then, when the tax and insurance bills arrive, the money is already waiting.

The danger is treating that $900 as spendable cash simply because it isn't included in your mortgage payment.

Impound Account or No Impound Account: Which Is Better?

Neither option is automatically better.

If you like simplicity, predictable budgeting and having someone else handle the bills, an impound account can be extremely convenient.

If you're disciplined with money, maintain adequate reserves and prefer having complete control over when and how your bills are paid, you may prefer paying taxes and insurance yourself—assuming your loan allows it.

The important thing is to understand exactly what is included in your mortgage payment before you close your loan.

Don't Compare Mortgage Payments Without Comparing the Details

This is particularly important when you're comparing loan quotes.

One lender might quote only principal and interest while another shows the complete payment including estimated taxes, homeowners insurance, mortgage insurance and other applicable housing expenses.

At first glance, one loan can appear to have a much lower payment even though the underlying loan terms aren't actually better.

Always make sure you're comparing apples to apples.

Look at the interest rate, lender costs, loan terms and exactly what is—and isn't—included in the payment.

Have questions about impound accounts, mortgage payments or how different loan options compare?

I believe home loan numbers and terms should be easy to understand. I'll explain your options, answer your questions and help you understand the real cost of your loan—without sales pressure.

Dennis E. Hughes | NMLS #178729
36+ years of home loan experience | 10,000+ loans closed
Serving home buyers and homeowners throughout California and a few other select states