Impound

Impound is an account maintained by mortgage companies to collect amounts such as hazard insurance, property taxes, private mortgage insurance and other required payments from the mortgage holders. These payments are necessary to keep the home but are not technically part of the mortgage.

Impound accounts are often required of borrowers who put down less than 20 percent. The purpose of the impound account is to protect the lender. Because low down-payment borrowers are considered high risk, the impound account assures the lender that the borrower will not lose the home because of liens or loss, as the lender pays insurance, taxes, etc., from the impound account when they are due. However, buyers don't need to maintain impound accounts forever. Once sufficient equity (usually 20 percent) is achieved, lenders can often be convinced to close the impound account.

Though the impound account is designed to protect the lender, it can also help the mortgage holder. By paying for these big-ticket housing expenses gradually throughout the year, the borrower avoids the sticker shock of paying large bills once or twice a year, and is assured that the money to pay those bills will be there when they need it. However, if the mortgage company does not pay these bills when they are due, the borrower will be held responsible, so borrowers should keep an eye out to make sure their mortgage companies are fulfilling their end of the bargain.

Federal regulations help borrowers keep an eye on the status of their mortgage accounts by requiring lenders to review borrowers' impound accounts annually to ensure that the correct amount of money is collected. If too little is being collected, the lender will start asking you for more; if too much money is accumulating in the account, the excess funds are legally required to be refunded to the borrower.

Sometimes, a mortgage impound is not required, but a borrower can elect to have one. On one hand, a mortgage impound may tie up money that might be better used elsewhere. Not all states require lenders to pay interest on funds held in impound accounts. Of those states that do require it, interest earned likely wouldn't approach the returns that could be earned by investing the money. Although the impound account is designed to protect the lender, it can also be beneficial for the borrower. By paying for big-ticket housing expenses gradually throughout the year, borrowers avoid the sticker shock of paying large bills once or twice a year.