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What is an Impound Account?

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Definition: In some parts of the country, an impound account is referred to as an escrow account. This is not an escrow account to buy a home. Escrow accounts are trust accounts, and so are impound accounts. Just like your car can be impounded if it's towed away from a no parking zone, your money for taxes and insurance can be impounded by the bank, except you will willingly give the bank your money. It's not seized from you.

Some banks require this trust account because the banks want to make sure that their security is not jeopardized. The bank impounds, or collects, monthly payments from a borrower to set aside enough to pay the taxes and insurance as they come due. In other words, the bank takes over paying your taxes and insurance. You pay the bank and the bank pays your bills.

When impound accounts are established, they generally contain a few months of reserves in advance, depending on when the actual tax bill is due. But the monthly payments of mortgage principal and interest generally include about 1/12th of the tax bill and insurance bill. Banks will sometimes let a homeowner pay their own bills if the homeowner has an amount of equity in the homes that makes the bank feel comfortable enough to let go.

But banks generally prefer to pay the taxes and insurance because then the bank is assured those payments are current. So, sometimes the bank will offer a borrower a little bit lower interest rate if the borrower will let the bank pay taxes and insurance on the borrower's behalf.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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