When you buy a home or refinance, your mortgage lender may require “impounds.” This means each month, the loan servicer collects into an escrow account money that's used to pay big annual bills like property taxes and hazard insurance premiums. It makes the loan less risky for the lender, which is why impounding is required for most loans over 80 percent.
More Home Loans Will Have Mandatory Impounds
Impounds will become more widespread after June 1, 2013, when new rules from the Consumer Financial Protection Bureau(CFPB) make them mandatory for more home loans, and for longer periods.
Are You Likely to Be Affected?
The new CFPB rules are set to extend the use of impounds, making them mandatory for at least the first five years of a mortgage's life if both the following are true:
- The loan is a "first-lien" home loan (not a second mortgage, home equity loan, etc.).
- The mortgage meets the definition of "higher priced," which means that the annual percentage rate (APR) exceeds that day's Average Prime Offer Rate (APOR -- see below) by 1.5 percentage points or more.
Certain small lenders in rural areas are exempt from this rule, but most are bound by it.
The definition of “higher priced” for jumbo mortgages (loan amounts exceeding the loan limit set by Freddie Mac or Fannie Mae for properties in your area).“Higher priced” for jumbo home loans means the APR exceeds the APOR by 2.5 percentage points or more.
You can check the ruling APOR using this government online calculator.
These new rules set only minimum legal requirements. If it wanted, your lender could still require impounds, even if your mortgage falls outside these parameters. And, of course, you could always request that impounding be set up for you.
How Impounds Work
The following describes the more common processes in maintaining a monthly impound account. Each year, your lender receives from your local authority a notification of your property taxes, and from your insurance company a statement of the premiums that are going to fall due. It then mails you an escrow analysis, laying out how much your monthly mortgage payments are going to be over the following 12-month period. If they're different from the previous year's, you may have to change your automatic mortgage payments, depending on the sort of account and payment service you use.
Sometimes, the unexpected occurs and you end up owing some money (a "shortage"). Often, your lender allows you to choose whether to pay that in full or spread it over the following year's 12 payments.If your account ends the year with a credit balance of more than $50, expect a check for this "overage." Smaller credits may be applied to your next payment.
Impounds Can Cause Errors
You sometimes hear about nightmarish stories about impounds. One tells of a bank paying property taxes from an account for the entire condominium complex where the borrower's single condo was located. More common errors may involve a lender paying a neighbor's taxes because of an error when inputting the Tax ID number, or missing out on payments to one or more tax authorities in parts of the country where these can be numerous.
However, such problems are rare and usually easy to resolve. If your taxes or insurance go unpaid, you’ll get a notice from your insurer or county assessor. In that case, contact your mortgage servicer promptly and they should resolve the problem.
Although some hate impounding, preferring to control their payments themselves, it can be, in the words of the CFPB, "an important consumer protection." Impounding can help you recognize the costs of homeownership and greatly assist in budgeting.
So if your lender wants you to have an impound account, think twice before you throw up your hands in horror.