What is an escrow/impound account?
An escrow account, also known as an impound account, is an account set up at the time you close your mortgage loan for the payment of your property taxes, homeowner’s insurance and PMI (only if it is a requirement of the loan). Once your impound account is setup, and beginning with your first mortgage payment, you will pay 1/12 of your annual taxes and insurance (and PMI) along with your mortgage payment. These funds are placed in your escrow/impound account and will show on your monthly mortgage statement. This is true for Purchase or refinance transactions.
Your loan servicer will pay your taxes and insurance out of the escrow/impound account when they come due and payable. You will also receive an Annual Escrow/Impound Analysis Statement each year, showing the activity and balance remaining in your account.
Many States in the USA have different rules as to when an impound account is mandatory – In California you are only required to have an escrow/impound account when the LTV (Loan-divided by-Value) ratio on your loan is over 90%. However in Florida, any LTV greater than 80% requires impounds.
There is an advantage to pricing for having an impound account; all States price this differently, however it’s just a matter of preference; some borrowers appreciate having these additional housing expenses managed by the mortgage loan servicer. In the case where Flood insurance is required on the property, impounds are mandatory for the payment of this specific insurance premium.
Note: when the borrower waives the impound account and elects to pay the taxes and insurance themselves, they can pay these items on their own timetable, when the lender’s servicing department pays these debts, they pay at their own discretion, in their own time.
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