What are impounds?

I get asked this question quite often.

When you take out a loan on real property you may have two options for how you want to pay your property taxes and hazard insurance.    You can either pay them in large sums twice yearly when they are due, or you can pay them monthly via impounds.

If you make the decision to pay your taxes and insurance monthly (most people do) then the lender collects them along with your monthly mortgage payment and pays them when they are due.  This is an especially good option for people who aren’t the best at saving money.  The lender does collect a very small fee for this service.

There is another important part to impounds you should know.  When you close a loan that has impounds you will at that time be required to “fund your impound account”.  This means that at closing in addition to coming up with your regular closing costs you will have to come up with any where from 2 to 9 months worth of impound payments up front.  The lender collects this money and puts into an account for you.  This is their way of making sure there will always be enough money in your account to pay your impounds.   This money required up front is not technically a lender fee since it will be used to pay your taxes.  Keep in mind this can be a substantial sum (thousands of dollars).  Exactly how much you need to come up with at closing will depend on a few things like, your county’s tax rate, the purchase price of your home,  and what month of the year you close escrow on your home.

Lastly you may have noticed in the first sentence of this post  I said you “may have two options for how you want to pay your property taxes and hazard insurance”.  The reason I used the word “may” is because in many scenarios you don’t have a choice.  For instance, as of today most lenders require that you have impounds on any purchase where you will have less than a 20% equity position.  This means that if you down payment is less than 20% of the purchase price the lender is going to require impounds.

It is also important to note that it may cost you a little extra to get a loan without impounds.   I will get into why this is in another post in the future.

Now that you know what impounds are you are well on your way to being an Intelligent Buyer! Feel free to ask if you have any more questions.

Andrew