What Is an Impound Account and Why Do You Need One?

When you’re buying a home, especially for the first time, you’ll come across a lot of unfamiliar terms—and “impound account” is often one of them. Also known as an escrow account, an impound account can seem confusing at first, but it plays an important role in managing your homeownership expenses.

So, what exactly is it, and why might you need one? Let’s break it down.

What Is an Impound Account?

An impound account is a special type of account set up by your mortgage lender to pay for certain property-related expenses, primarily:

• Property taxes

• Homeowner’s insurance premiums

• Sometimes mortgage insurance

  
  

Each month, when you make your mortgage payment, your lender collects extra money along with your principal and interest to set aside in this account. When your tax and insurance bills come due, your lender uses the funds in your impound account to pay them on your behalf.

Why Do Lenders Require Impound Accounts?

Lenders want to ensure that property taxes and insurance are paid on time because unpaid taxes can lead to liens on the property, and lack of insurance increases their risk if something happens to the home. By requiring an impound account, lenders protect their investment and help homeowners stay on top of these essential costs.

In some cases—especially if your down payment is less than 20%—a lender may require you to have an impound account as a condition of your loan.

The Benefits of an Impound Account

• Convenience: You don’t have to worry about saving up a large lump sum to pay your property taxes or insurance—your lender does it for you.

• Peace of mind: Payments are made on time, avoiding penalties or coverage lapses.

• Easier budgeting: Spreading out your taxes and insurance costs over 12 months can make monthly budgeting easier and reduce financial stress.

  
  

The Drawbacks to Consider

• Higher monthly payments: Because you’re paying more than just principal and interest, your monthly mortgage payment will be higher.

• Less control: Some homeowners prefer to handle their own tax and insurance payments, and an impound account removes that flexibility.

• Potential escrow shortages: If your taxes or insurance premiums go up, your lender may require a shortage payment to make up the difference or increase your monthly payment.

  
  

Do You Have a Choice?

Whether or not you need an impound account often depends on your loan type and the size of your down payment. If your lender does not require it, you might be able to opt out—but you’ll need to be diligent about saving for those annual or semi-annual bills on your own.

Final Thoughts

An impound account can be a helpful tool to simplify homeownership and ensure you’re staying current on important payments. While it may not be the right fit for everyone, it offers added security and convenience, especially for new homeowners.

Still have questions about impound accounts or the home buying process in general? Feel free to reach out—I’m here to help guide you through every step of your real estate journey.