Mortgage Basics 2: The impound account
When getting a quote for a home loan, most people are familiar with the term closing costs. Rarely do lenders explain the impound account or "pre-paids" and how it will require you to bring in on average an additional couple of thousand dollars, depending on the property tax rate and your home insurance.
What the heck is an impound account?
An impound account is an account that sets aside money to pay your property taxes and insurance. Property taxes are due every six months to the county and home insurance premiums are typically due annually.
Rather than having to come up with six months worth of taxes at a time and a full insurance premium, you include a monthly payment for taxes and insurance in your total monthly mortgage payment.
For example: Your monthly payment may look something like this:
$1456 loan payment
$188 mortgage insurance
$300 property taxes
$60 home insurance
$2,004 total monthly payment
While your loan payment on the money you borrow is only $1456, your total monthly payment includes the monthly collection of taxes and insurance. When your taxes and insurance are due, they are paid on your behalf from money you've paid every month to the lender, and the lender has put that money aside on your behalf.
A good way to think about it is like you are paying into a "checking account" monthly that you cannot touch because the money has to only be used for paying taxes and insurance.
But wait, do I have to have an impound account?
If you put down less than 10% when purchasing your home, you MUST have an impound account.
What are the benefits and drawbacks?
The benefit is that when taxes and insurance are due, you don't have to dish out a chunk of money. Also when you refinance or sell your property, you will get a check back for the current balance in that account. Another benefit is you get a better interest rate. Lenders will actually give you a WORSE interest rate if you have the option and choose to NOT have an impound account.
The main draw back is that upfront, you will have to put in about six months of property tax money and a years worth of insurance money. That means coming in with an extra couple of thousand dollars potentially to get the keys to your home.
In summary, I like impound accounts, I have one on my personal mortgage. I like knowing that I am not paying anything more to have an account that makes it easier for me to pay for my real estate taxes and home insurance.
An awesome tip is that when buying a home, you can get a seller credit to offset the impounds and closing costs. SO you could potentially buy a house and have the sellers give you a credit that pays for your first tax bill and a years worth of home insurance!
For any other questions let's talk, give me a call! 951.595.1345