Another common name for an escrow account, particularly depending on your geographic location, is an impound account.
Understanding Escrow and Impound Accounts
An escrow account serves as a temporary holding place for funds, often related to real estate transactions, particularly mortgages. While widely known as an escrow account, it can also be referred to as an impound account. This alternative term is frequently used, especially in certain regions, to describe the same type of financial arrangement. Both terms refer to an account managed by a third party or a lender to hold funds on behalf of two other parties.
What is an Impound Account?
An impound account is essentially an escrow account specifically set up by your mortgage lender. Its primary purpose is to collect and disburse funds for specific property-related expenses on your behalf. This mechanism simplifies the process of paying important costs associated with homeownership, ensuring they are covered in a timely and consistent manner.
How Does it Work?
The funds held within an impound account are derived directly from a portion of your monthly mortgage payment. Instead of you having to manage separate payments for various property expenses, your lender collects these amounts along with your principal and interest payments. The money accumulates in the impound account and is then used by the lender to pay for:
- Property Taxes: These are taxes levied by local government authorities on real estate.
- Homeowner's Insurance Premiums: The costs for insuring your home against damage, loss, or liability.
- Mortgage Insurance Premiums (MIP) or Private Mortgage Insurance (PMI): If applicable to your specific loan type and equity.
This system provides a convenient way to budget for significant property-related costs and ensures that these essential payments are made regularly and on time, reducing the risk of penalties, late fees, or lapses in coverage. It helps homeowners manage their financial obligations related to property ownership more effectively.