While a rewarding investment, homeownership comes with a slew of expenses, some of which may be unexpected. Between the mortgage, home repairs, maintenance, insurance, and taxes, staying financially organized is paramount to being a successful homeowner. This is one of the reasons that many lenders require some of these expenses to be included in your monthly mortgage payment as part of what is known as an impound.
Impound accounts are meant to protect homeowners from falling behind on payments associated with homeownership. Many mortgage companies ask that an entire year’s worth of homeowners insurance premiums be paid with closing costs to ensure that the investment will be protected against peril for at least the first year. They may require the impound to continue for longer than that, maybe even for the duration of the loan. It is becoming more and more common for lenders to require property taxes to be held in an impound account throughout the duration of a mortgage.
When property taxes are being held in an impound by a mortgage company, they determine what the yearly amount of property taxes will be, divide that by 12, and include this amount in the mortgage payment each month. At the end of the year, the mortgage company will pay the taxes due on the property without the homeowner having to worry about it.
An impound can be convenient for homeowners, but even those who don’t wish to participate may not have a choice. Many lenders include impound accounts as a requirement for qualifying for a mortgage, and they have a good reason for this. In the case of a foreclosure, back due property taxes take precedent over what is owed to the lender. The amount owed to the government can be a sizeable amount of the equity in the home. This makes it difficult for the lender to recuperate any of their losses on the home. In extreme cases where property taxes are severely past due, the government can seize the home and sell it to pay the taxes, leaving the lender high and dry. But if the tax has been collected by the mortgage company as part of an impound, they can pay off the tax first and avoid the home being seized or sold by the government.