An impound account (also known as an escrow account) is an account that's set up for you by your lender to collect funds from you that are used to pay future property tax bills and hazard insurance premiums. Its the "TI" in "PITI."
After closing, you'll pay one-twelfth of your insurance premium and property tax bill to the lender each month along with your principal and interest payment. The lender is then responsible for paying your property tax bill and hazard insurance premium when they come due. An impound account is almost always required if the borrower makes a down payment of less than 20% of the purchase price. This requirement will vary from lender to lender.
Money is collected from the borrower at closing to set up the impound account. This amount will vary depending on what month of the year you close. If the property tax bill was recently paid and the next installment isn't due for some time, the amount required to start the impound account will be less than it'll be if the property taxes need to be paid in the near future. The amount collected at closing will usually be enough to cover several months worth of taxes and insurance.
Although most people prefer not to have an impound account unless it's required, some people prefer having one because it relieves them of the obligation to pay taxes and hazard bills as they come due. We'll advise you to take advantage of an impound account. An impound account is a good idea if you're on a tight budget, or if you've had difficulty
Some states now require lenders to pay interest on the amount held in escrow. In addition, the 1990 Housing Bill recently signed into law by the President, requires lenders to issue itemized statements of escrow accounts to borrowers on an annual basis. While many lenders are already providing homeowners with regular statements of their escrow accounts, the law ensures that every lender follows this practice.
The irony of the impound account is that it's required of borrowers who have the least amount of money to put down. Most cash-strapped first-time buyers have difficulty scraping together enough money for a down payment, plus closing costs. This is precisely the situation where lenders insist on an impound account, which adds to the amount of cash the buyer will need at closing.
There is another way to get around this cash-on-hand requirement. Many lenders will waive the impound account requirement if the borrower puts slightly more than 10% down. For example, if you can put enough cash down to equal 10.1% of the purchase price, you can probably avoid having an impound account.
If you do end up with an impound account, be sure to carefully monitor the payment of your property taxes and insurance premiums. Lenders do occasionally make mistakes.
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