Escrow or Impound Accounts: What You Need to Know
Around 80% of mortgage borrowers in the United States have an escrow or impound account. These accounts are required by some lenders and hold money on behalf of the buyer to ensure payments like homeowners insurance and property taxes are made on time. But what exactly are escrow or impound accounts, and are they necessary?
An escrow account, also known as an impound account, is set up to manage expenses related to large purchases, such as buying a home. These accounts are typically managed by a third party and help ensure a smooth transaction between buyers and sellers. Funds for expenses like property taxes or insurance premiums are set aside each month from your mortgage payment, making it easier to manage these expenses.
Depending on the purchase you’re making, you may need an escrow or impound account. For example, if your car has been impounded or you owe back taxes, a court may require an impound account to hold funds until legal proceedings are finalized. Similarly, some lenders may require an escrow account for property taxes to mitigate the risk of missed payments.
While escrow or impound accounts may be required for some loans or purchase agreements, they are not always necessary. Homeowners with exceptional credit or a substantial down payment may be able to waive these accounts. However, canceling an escrow account can have financial implications, such as higher fees for the lender to assume the risk.
In conclusion, escrow or impound accounts can be useful money management tools for large purchases. They help break up expenses over time and offer protection for buyers, sellers, and lenders. Whether or not you need an escrow account ultimately depends on your financial situation and the terms of your purchase agreement.