Escrowed Taxes & Insurance

Aug 20

What is an Impounded Escrow Account for Taxes and Insurance?

When you purchase a home you have property taxes and homeowners insurance payments in addition to your mortgage payment. Property taxes are usually due twice a year to the county and your homeowner’s insurance premium is due once a year upon renewal. If you do not impound property taxes and insurance in an escrow account, you as a homeowner are responsible for making those payments when they are due. Alternatively they can be paid through the escrow account.

An impounded escrow account for property taxes and insurance collects money each month on top of your principal and interest payment. Each month, a portion of your total mortgage payment goes into this escrow account. Instead of you having to pay your taxes and insurance in large lump sums once or twice a year, your lender pays those bills on your behalf when they come due. This leads to a higher total minimum payment on your mortgage each month, but eliminates you paying those bills on your own.

In addition, you will pre-fund the escrow account when you buy a home. This is because you won’t have a mortgage payment right away and the property taxes are collected at specific times of the year. The prefunding of this account ensures enough money will be set aside to make those payments when due. These go in Section G of your loan estimate, while they are listed as closing costs, they really are going towards your future cost of homeownership. Think of it as a savings account set up on your behalf for property taxes and homeowners insurance.

What is an Impounded Escrow Account Required?

For a conventional loan, If you have a 20% down payment an impounded escrow account is not required and in some cases if you put 10% down. If you have an FHA mortgage it is ALWAYS required.

What should you chose?

If you are responsible with your bills, and you know you can make the property tax and insurance payments on your own, don’t have an impounded escrow account. If you are bad with budgeting, forgetful, and don’t mind the higher monthly payment, then go with the impound account. Just remember that it will increase your closing costs because you have to prefund the account.

Issues with Impounded Escrow Accounts:

Property Taxes in the First Year - The county does not update your property taxes right after you buy the home. This leads to them sending the normal tax bill based off the old assessment, and then sending supplemental tax bills once they update your tax assessment. They never send the supplemental bill to the mortgage servicer holding your impound account. When you get a supplemental tax bill you need to send it to your mortgage servicer (call the number on your mortgage statement. While the money is set aside in your impounded escrow account, that bill won’t get paid unless you relay it. This causes a lot of homeowners to think their property taxes are paid by the servicer, but the servicer never got the supplemental tax bill.
Shortages and Surpluses - Your property taxes and homeowners insurance costs will change over time. This will cause changes in the payment you need to make monthly. The escrow account might be short the funds needed to make the payments if your property tax and insurance costs jump drastically. On the other side they may collect to much and you may receive a refund.