What Is an Impound Account for My Property Taxes and Insurance?

The Consumer Financial Protection Bureau (CFPB) explains that an escrow account, also called an impound account, is set up by your lender or servicer to pay certain property-related expenses, mainly property taxes and homeowners insurance. Instead of facing one or two large bills a year, you pay a little each month along with your mortgage.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. First-time buyers often see "impounds" on their loan paperwork for the first time and wonder why the number is so large. Here's what it means.

This is general information. Your lender can tell you exactly how your loan handles it.

It depends on your loan. The CFPB notes that some lenders require escrow, and some laws do too.

In California, Civil Code Section 2954 limits when a lender can require an impound account on a single-family, owner-occupied home. The exceptions include loans of 90 percent or more of the price or appraised value, loans made or insured by a government agency, and cases where a borrower has missed tax payments.

Federal rules also matter. The CFPB says a borrower with a higher-priced mortgage loan may be required to keep an escrow account for at least the first five years.

Even when it's optional, many buyers choose one because it makes budgeting easier. Ask your lender whether it's required on your loan and whether there's a fee or a rate change if you waive it.

When the account opens, your servicer collects a starting balance so there's enough money when the first bills arrive. That shows up on your Closing Disclosure as initial escrow payments.

Federal rules allow a cushion on top of the expected bills. Under the CFPB's Regulation X, that cushion can't be more than one-sixth of the estimated yearly payments from the account, which works out to about two months.

For more on what else you pay that day, see What Will I Pay at Closing as a First-Time Buyer?

The Orange County Treasurer-Tax Collector says the first installment of the yearly secured tax bill is due November 1 and becomes delinquent after December 10. The second installment is due February 1 and becomes delinquent after April 10. Late payments carry a 10 percent penalty, and the second installment adds a cost fee.

With an impound account, your servicer pays those installments for you. It's still smart to look up your bill on the Treasurer-Tax Collector's site each fall to confirm it was paid.

One bill usually isn't covered. The Treasurer-Tax Collector notes that mortgage companies do not usually pay supplemental tax bills, the extra bills new owners often get after a purchase. Set money aside for that one. Learn more in How Will My Property Taxes Be Set When I Buy?

Your servicer reviews the account once a year. If taxes or your insurance premium went up, your monthly payment usually goes up too.

The CFPB's rules spell out what happens next:

• Surplus. If there's a surplus of $50 or more, the servicer must refund it within 30 days of the yearly review.
• Small shortage. If the shortage is less than one month's escrow payment, the servicer can leave it, ask you to repay within 30 days, or spread it over at least 12 months.
• Larger shortage. If it's one month's payment or more, the servicer can leave it or spread it over at least 12 months.

Read your annual escrow statement when it arrives. It shows what was paid and why your payment changed.

If you're planning your first purchase and want to understand your full monthly payment before you write an offer, I'd love to help. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.