Impound accounts, escrow accounts, escrows, impounds... four different ways of saying the same thing!

"What are impound accounts?"

As you may have read in our previous post "What's in a mortgage payment?," property taxes and homeowner's insurance must be paid on time in order to keep your lender happy.

An impound account allows you, the borrower, to take the annual amount due to the county (for property taxes) and your insurance company (for homeowners insurance) and make these payments in twelve installments over the course of a year instead of paying them in lump-sum annually or semi-annually.

Lenders like impound accounts because they ensure county taxes will be paid on time (thereby avoiding the headache of a tax lien). Additionally, the existence of an escrow account ensures that homeowner's insurance policies are active and paid current in case of a catastrophic event that damages or completely destroys your home.

In order to incentivize borrowers to utilize impound accounts, lenders generally lower interest rates .125-.250% in exchange for the piece of mind they provide.

Impound accounts are generally helpful to borrowers as well. It's much easier to pay thousands of dollars in property taxes in small parts instead of all at once.

Some borrowers choose to "waive impounds" (that is, to not pay into an escrow account) for a variety of reasons. Most commonly, borrowers who consistently come into money at a certain time every year (think annual bonuses, dividends, stock payouts) choose to increase their cash flow throughout the year and pay their property taxes and insurance on their own.