Impound Account
An impound account, also known as an escrow account, is a savings account set up by a mortgage lender to pay property taxes and insurance premiums on behalf of the borrower. Borrowers make monthly payments into the account along with their mortgage payment, and the lender disburses these funds when the taxes or insurance premiums are due. This ensures timely payments and can prevent borrowers from falling behind on these obligations.
Examples
- Mortgage Impound Account: A common example is when a homeowner pays their lender a combined amount covering their mortgage, property taxes, and homeowner’s insurance. The lender then pays these bills on the homeowner’s behalf.
- Auto Loan Impound Account: Similar to mortgages, some auto loans set up impound accounts for insurance payments.
- Pooled Reserve Fund: Some homeowner associations use impound accounts to collect and manage funds for common area maintenance and repairs.
Frequently Asked Questions
Q1: Why do lenders require an impound account?
A1: Lenders require impound accounts to ensure that property taxes and insurance premiums are paid on time, protecting their interest in the property and avoiding lapses in coverage or liens.
Q2: Can a borrower opt out of having an impound account?
A2: Depending on the lender and the specific loan terms, some borrowers may have the option to waive the impound account requirement if they meet certain conditions, like a higher down payment.
Q3: How is the amount to be deposited into the impound account determined?
A3: The lender estimates the annual tax and insurance obligation and divides this amount by 12 months to calculate the monthly deposit.
Q4: What happens if the impound account has a surplus at year-end?
A4: If there’s a surplus in the impound account at the end of the year, the lender will typically offer escrow balance reconciliation and either refund the excess amount to the borrower or apply it to future payments.
Q5: Is the contribution to an impound account tax-deductible?
A5: Contributions to the impound account itself are not tax-deductible. However, the property taxes and mortgage interest paid using the account can be deductible, depending on the tax laws.
- Escrow Account: An account held by a third party on behalf of two other parties, where funds deposited are held in trust until they are needed for specific purposes, such as the payment of taxes and insurance.
- Reserve Fund: A savings account used by homeowners or homeowners associations to save money for future expenses or emergencies, different from an escrow account used specifically for regular tax and insurance payments.
Online References
Suggested Books for Further Studies
- The Mortgage Professional’s Handbook: Succeeding in the New World of Mortgage Finance by Jess Lederman
- Home Buying Kit For Dummies by Eric Tyson and Ray Brown
- The Book on Managing Rental Properties by Brandon and Heather Turner
Fundamentals of Impound Account: Mortgage Basics Quiz
### What is the primary purpose of an impound account in a mortgage agreement?
- [ ] To save for potential home repairs and maintenance.
- [ ] To accumulate savings that can be withdrawn at any time.
- [x] To ensure timely payment of property taxes and insurance premiums.
- [ ] To increase the borrower's credit score.
> **Explanation:** The primary purpose of an impound account in a mortgage agreement is to ensure the timely payment of property taxes and insurance premiums on behalf of the borrower.
### Who typically manages an impound account?
- [x] The mortgage lender
- [ ] The borrower
- [ ] A property manager
- [ ] A financial advisor
> **Explanation:** The mortgage lender typically manages the impound account, collecting funds from the borrower and disbursing payments as needed.
### Can an impound account balance earn interest for the borrower?
- [x] Yes, but it depends on the lender and state regulations.
- [ ] No, impound accounts never earn interest.
- [ ] Yes, all impound accounts earn interest by law.
- [ ] Only if the monthly mortgage payment is above a certain amount.
> **Explanation:** Whether an impound account earns interest depends on the lender's policies and state regulations. Some states require lenders to pay interest on impound account balances.
### What happens if there's a shortage in the impound account?
- [ ] The lender will reduce the mortgage principal.
- [ ] Nothing, the payments continue as normal.
- [x] The lender may require the borrower to pay the shortage or increase future payments.
- [ ] The lender will cancel the mortgage contract.
> **Explanation:** If there's a shortage in the impound account, the lender may require the borrower to pay the shortage or increase future monthly payments to cover it.
### Over time, how can property taxes affect the impound account contribution?
- [x] Property tax increases can lead to higher monthly impound payments.
- [ ] Property tax amounts remain static, so there’s no effect.
- [ ] Property taxes are paid directly by the borrower and do not affect impound accounts.
- [ ] Property taxes can decrease the need for an impound account.
> **Explanation:** Increases in property taxes will result in higher monthly contributions to the impound account to ensure sufficient funds are available for payment when taxes are due.
### In what situation might a borrower need to opt for a larger initial deposit into an impound account?
- [x] When starting a new mortgage or if required by the lender after a review.
- [ ] When selling the property.
- [ ] When interest rates drop.
- [ ] When filing for bankruptcy.
> **Explanation:** A larger initial deposit into an impound account might be required when starting a new mortgage or if the lender requires it after a review of the account.
### Is the insurance premium payment made from the impound account tax-deductible?
- [ ] Yes, the full amount of insurance premiums paid from the impound account is tax-deductible.
- [ ] No, insurance premium payments are never tax-deductible.
- [x] Only if they are related to income-producing properties.
- [ ] It depends on the state where the property is located.
> **Explanation:** Only insurance premium payments related to income-producing properties can be tax-deductible. Generally, homeowner insurance premiums are not tax-deductible.
### What term is most closely associated with "impound account"?
- [ ] Reserve Fund
- [ ] Savings Account
- [x] Escrow Account
- [ ] Credit Line
> **Explanation:** The term "escrow account" is most closely associated with "impound account," as both terms are used interchangeably to describe accounts used to pay property taxes and insurance premiums.
### How frequently are payments typically made into an impound account?
- [ ] Annually
- [ ] Bi-annually
- [ ] Quarterly
- [x] Monthly
> **Explanation:** Payments into an impound account are typically made on a monthly basis as part of the borrower's mortgage payment.
### Which type of expenses are normally paid from an impound account?
- [ ] Utility bills
- [ ] Mortgage principal
- [x] Property taxes and insurance premiums
- [ ] Personal expenses
> **Explanation:** Property taxes and insurance premiums are normally the types of expenses paid from an impound account set up by the lender.
Thank you for learning about impound accounts and trying out our quiz. With comprehensive knowledge and preparation, you can navigate the financial aspects of homeownership confidently!
