What Does It Mean to Impound Property Tax and Homeowner’s Insurance?
Impounding your property tax and homeowner’s insurance is when you agree to make monthly installments for each with your normal principal and/or interest home loan payment to the loan servicer. The servicer, in turn, agrees to make property tax installment payments and homeowner’s insurance payments when the bills become due. Many people enjoy the convenience of an impound account but fail to realize the negative financial requirements to establish and operate one. Let’s take a closer look!
Three Reasons to Reconsider Impounding Property Tax and Homeowners Insurance
Requires More Upfront Cash or Higher Monthly Payment
First, impounding your property tax & insurance requires more cash from you or a higher loan amount to close on your new loan. When you are transacting on a purchase or refinance home loan and you elect to include an impound account (also called an Escrow Account,) the lender will require that you pre-fund a reserve balance, sometimes up to 9 months worth of property tax equal to thousands of dollars. The downside is that this reserve balance either has to come out of your pocket or built into the loan amount, with the latter being the norm. Therefore, you either lock into a higher monthly payment because of the higher starting balance or you have thousands of dollars less in your own savings account.
Inaccurate Payment Amount Fluctuations
A second negative aspect of having an impound account is the poor communication between large corporate loan servicers and public tax collectors resulting in inaccurate payment amount fluctuations to your monthly bill. Because public government entities have a lag time in reporting new tax assessment for your property as a result of the recent sale, the loan servicer thinks they are over-collecting property tax. The servicer, in turn, refunds you a chunk of money you aren’t expecting without explanation. Your payment also drops! However, this process is creating a void in your collected impounds and once the tax collector updates their records, the servicer comes back to you asking for a bulk sum to get you caught back up to where you originally started! If you can’t pay it right away, they increase your monthly payment above the original amount to get you caught up over time. It’s a comedy of errors, highly inconvenient for you and can present you with an unexpected and unaffordable payment for many months.
No Interest Will Be Paid
Last, the loan servicer will not pay you interest on your money while they hold it! While the actual interest is marginal at best on several thousand dollars for each individual, the total amount is quite significant when a loan servicer has tens and even hundreds of thousands of borrowers.
Now that we know the negative aspects, let’s review a better strategy! Personal banking technology has advanced in recent years and its easy to establish your own “impound” account. Here are the steps:
- Simply open a free checking account with your current depository bank and name it “Taxes and Insurance – Don’t touch!”
- Determine your actual annual property tax and insurance payments, add them together and divide by 12 giving you your correct monthly payment amount.
- Set up an automatic monthly transfer from your primary account to your “Taxes and Insurance – Don’t Touch” account.
- Ensure your mailing address with the tax collector is accurate and sign up for any electronic notifications they might offer about the bill due date.
- Add the property tax and annual insurance renewal dates to your preferred personal or online calendar and set reminders.
You have effectively set up your own impound account, are ready to make the payment from your new account when it’s due, and have avoided thousands of extra upfront closing funds and unnecessary payment fluctuations from your loan servicer!
Happy Homeownership from Assist Home Loans!
- Justin Stearns, BA Economics – UC Davis, NMLS 258870