To impound or not? Is using an escrow account the better option?
Whether you call it an escrow or impound account, the dynamic is essentially the same: Portions of your monthly home loan payment are set aside into an account to cover expenses such as property taxes and homeowner’s insurance. What it’s called depends largely on the region in which the property is located.
Escrow or impound accounts are usually not required, but there are compelling reasons to opt for one. For any questions about purchasing a home, please speak to a loanDepot licensed loan officer at (888) 983-3240.
Pay a little each month
Lenders understand a home purchase is a big life change. Additional expenses can strain your monthly budget, even when you’re expecting them. To help alleviate the pressure of having to pay a property tax or insurance bill all at once, you can pay a portion with your home loan payment each month instead. Keep in mind, certain loan programs require an account.
While finalizing your home purchase agreement, a portion for escrow or impound will be calculated and added to your monthly payment. Your lender will hold those funds in the escrow/impound account and assume responsibility for getting the bills paid, typically twice a year. If your tax or insurance costs rise, the lender will notify you and raise your monthly impound payment. If your rates are lower than calculated, the amount is refunded to you at the end of the year or rolled into the next year, with your impound payment likely decreased.
Get the big picture
While escrow/impound in some instances is a requirement, all FHA- and VA-insured loans call for an impound account. (Click here to learn more about FHA loans and here for VA loans.) And if your down payment is below 20 percent, your lender could make an impound account a condition of your loan. If you have a conventional mortgage with a loan-to-value ratio below 80 percent, you may be able to skip the account and handle the payments on your own if you feel comfortable doing so.
Ask about any difference in the interest rate for a home loan with an impound account and one without. Some lenders will charge a slightly higher rate for borrowers who don’t want to impound. Or you might face a separate fee for waiving the impound requirement.
Peace of mind
The strongest argument for agreeing to an impound account is that once it’s added to your bottom line, it becomes a portion of your home loan payment and most borrowers don’t even think about it. Twice a year, when the property tax bill arrives, you can heave a sigh of relief and forward it to your lender knowing it’s already taken care of.
Incidentally, you can still claim your property tax as an itemized deduction on your federal income taxes. Your lender will report the property tax paid from your impound account in the annual 1098 form all home loan borrowers receive.
Managing your own money
Keeping control of the payments can give you the opportunity to do some year-end tax planning. Property tax payments are deductible in the calendar year they’re paid if you itemize your federal return. Prepaying part or all of next year’s tax bill in the current year will increase your deductions for the current year. You can’t do that if your lender is in charge of your tax payments.
If the loan program you’re using doesn’t require an escrow or impound account, it’s ultimately your call. Never having to worry about those hidden expenses can provide less stress and more peace of mind so you can enjoy your home.
The licensed loan officers at loanDepot can guide you through the ins and outs of homebuying. Call (888) 983-3240 to speak with one now.
Published on Jan. 9, 2017
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