An impound account is another name for an escrow account — a reserve account maintained by the mortgage servicer to collect and pay property taxes and homeowners insurance on the borrower's behalf. The term "impound" is more commonly used on the West Coast and in certain lending circles, while "escrow" is the more universal term. Regardless of the name, the function is identical: a portion of each monthly mortgage payment is set aside in this account and used to pay tax and insurance bills when they come due.
Lenders require impound accounts to protect their investment. If a borrower fails to pay property taxes, a tax lien — which has priority over the mortgage — could result in the government selling the property. If hazard insurance lapses and the property is damaged or destroyed, the lender loses its collateral. By collecting and paying these expenses through an impound account, the lender eliminates these risks. Impound accounts are generally required when the loan-to-value ratio exceeds 80%, for all FHA and VA loans, and in some states by regulation.
The monthly impound amount is calculated by dividing the annual property tax and insurance costs by 12. For example, if annual property taxes are $6,000 and annual insurance is $2,400, the monthly impound amount is ($6,000 + $2,400) ÷ 12 = $700 per month, added to your principal and interest payment. Federal law under RESPA allows the servicer to maintain a cushion of no more than two months' worth of payments beyond what is needed — providing a buffer for unexpected increases.
Each year, the servicer performs an impound (escrow) analysis. This review compares the amounts actually collected to the amounts actually disbursed and adjusts the monthly impound payment going forward. If there is a surplus greater than $50, the servicer must refund it. If there is a shortage, the borrower's monthly payment increases. Significant shortages can result in a lump-sum payment or a spread over 12 months at the borrower's choice.
At closing, initial deposits into the impound account are collected as part of the buyer's prepaid items and closing costs. The closing disclosure shows exactly how much is being deposited and when the first payments from the account will be made. At Beycome Title, we calculate all impound deposits accurately based on your specific closing date and local tax/insurance schedules. Estimate your closing costs or get your free quote.