An impound account is an account created by the lender to pay for either property taxes and/or home insurance when they are due. The lender will send the payment to the County Assessor for property taxes and will send the payment to your home insurance company for your home insurance bill. To start an impound account, and at the close of escrow for your loan, the lender needs to setup the account with some reserves and usually is equivalent to 3-month’s worth of home insurance and/or from 1 – 9 months of property tax, depending on which month you are closing your loan. If you elected to have an impound account with your loan, you will need to send to the lender your regular mortgage payment plus payment for your impound account and usually you will send one check with both mortgage payment and impound account payment lumped together.
How is the impound account payment per month calculated? You will take the property tax and/or home insurance per year and divide by 12 months.
For example: Mortgage payment is $2500 per month. Property tax is $3600 per year and home insurance is $1200 per year. Combined total is $4800 / 12 = $400 (impound account) + $2500 (mortgage payment) = $2900 monthly payment sent to the lender in one check.
You can elect to have only property tax and/or home insurance as an impound account. For FHA and VA Loan Program, impounds are required for both property tax and home insurance. For Conventional loan, it is required if loan to value is equivalent to 90% and above.
Advantage of an impound account is that you will not have to worry about saving the lump sum payment to the County Assessor and/or home insurance company when they are due. By sending an installment payment to the lender for the impound account, the lender will make the payment for you when they are due. Only disadvantage to an impound account, is that you will not receive any savings interest on the account.
HOA dues cannot be impounded.
For Condo Only:
Your condo HOA dues include the building’s insurance only (ie the 4 exterior walls of the building, but not inside your condo). As for personal property including all real property (ie flooring, kitchen cabinets, water fixtures, sink, toilet, etc) attached INSIDE of your condo, the lender will require for you to get this covered by purchasing a homeowner’s insurance policy called “Wall-ins Coverage” or also known as “HO6 Policy”. If you ask for this type of coverage, then your home insurance agent will know what you mean. It is typically less than the cost of a regular single-family residence, because you are only insuring the inside of your condo. HOA dues cannot be impounded as you pay it separately and paid directly to the HOA management company. The homeowner’s insurance policy and property tax can be both impounded or impound is required depending on the type of loan you are getting.