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Mortgage Escrow: Mortgage Impound and Escrow Accounts

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Mortgage Impound Account BasicsMortgage escrow / impound accounts are a means of paying future large payments in advance, with smaller monthly payments. Mortgage impound or escrow accounts may be a requirement placed upon you by your lender, here are some examples.

Mortgage escrow accounts are usually set up by a lender who want to insure that you have the ability make annual or bi-annual payments, such as homeowner’s insurance, real estate tax and mandatory flood protection insurance when applicable. In some cases, your lender will allow you to make payments into an escrow account set up by yourself. What are the pros and cons of such accounts?

Mortgage Escrow: Mortgage Impound Accounts

With mortgage impound accounts you have no say in the matter. Such an escrow account is imposed on you by your lender as a condition of the mortgage loan. Your lender will set up the account separate from your mortgage account. That will then be credited with sufficient money to cover payments such as those above.

Your various payments will be added and then divided by twelve to come to a monthly sum. That sum is added to your monthly mortgage repayment, and the appropriate portion paid by your lender into the escrow account. When each lump sum payment comes due, it is paid by your lender from that escrow account. This has two advantages and one disadvantage.

Pros and Cons of Impound Accounts

The major advantage is that you have no need to worry about saving cash to make these annual payments. Your homeowner’s insurance is covered as are your real estate taxes and other mandatory payments such as flood protection in certain geographical areas. Nor need you concern yourself about when they should be paid – your lender looks after that for you.

The main disadvantage is that the cash is tied up. Also you receive no interest – at least not in most states. Some state laws require you to be paid interest,in which case that will be the standard bank rate for your own account less the mandatory rate to be paid by the lender.If your account pays 5% interest, and the mandatory rate payable on your escrow account is 4%, you would lose only 1% interest on the escrow balance, not the full 5%.

Minimum Mortgage Escrow Balance

Where a mortgage escrow account is applied, you should maintain a minimum balance in case your homeowner’s insurance or real estate taxes increase during the year of your mortgage payments. Your mortgage loan year is highly likely to straddle the regular times of year when such increases are announced and take effect.

Minimum balances are set by federal law or by state law and the terms of your mortgage loan contract. The maximum federal requirement is two months payments, although a lower amount could be acceptable according your own mortgage contract or state law. Should your balance be insufficient to make a payment you must pay it in full or can pay the shortfall in monthly payments over the following year.

In certain circumstances you will be obliged to set up an escrow account. For example, if the government has placed a lien on your home for failure to pay taxes, an escrow account will be demanded to ensure that your property taxes are paid. Otherwise, the IRS has first call on funds should its sale be forced.

In summary mortgage escrow is a safe way for you to arrange payment of homeowner’s insurance and real estate taxes. Otherwise known as mortgage impound, homeowners can set up voluntary escrow accounts to avoid having to make such payments in lump sums. More information is available from an independent mortgage advisor.

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