If you’re purchasing a new home or refinancing an existing home, your lender may require something called â€œimpoundsâ€ or â€œescrows.â€ Here’s a quick explanation of how these two loan terms will affect your loan amount.
We all know that property taxes and insurance are a part of life, right? Well, loan impounds are the lenders’ way of paying your tax and insurance for you by adding a little extra to your mortgage payments each month.
Some lenders require impounds in order to make sure the taxes and insurance on your property are paid on time. Others may leave the choice of having impounds up to you, but will offer a better rate of approximately .250% for having them.
If your loan has impounds, every month when you write the mortgage check your monthly taxes and insurance will be lumped in with the amount due. Each month your lender will set aside the tax and insurance money and deposit it into a separate escrow account. When your yearly taxes and insurance are due, they’ll pull out these funds and make the payments for you.
That might be convenient at the end of the year, but it’s important to realize that impounds may cost you a lot up front. Why? Keep reading.
Funding escrow up front
When your loan closes, in addition to paying for closing costs, you’ll be required to fund your escrow account for the current year. The amount required will vary depending on what month of the year you receive the loan.
In Oregon, if you’re receiving your loan in June for instance, you’ll need to pay 7 months of property tax in advance, plus an additional 2 months to cover the period of time between closing the loan and when your first payment is due.
That way when the lender goes to pay your property taxes (which are due November 15th, for Oregonians) there will be a full 12 months worth of funds available (9 months paid at closing plus the next 3 monthly payments).
With hazard insurance, lenders usually require 2 months worth of impounds up front. This will cover the time period after closing when no mortgage payments are due.
For example, if your loan closes May 15th then you usually wont have a payment due until July 1st but those two months still need to be paid. Again, this is just to insure a full 12 months of funds are available to renew your policy, which will expire exactly 1 year from when the hazard insurance is first purchased.
Having impounds on your loan can drastically increase the amount of money you’ll need at closing by thousands of dollars. Make sure to ask your loan officer at the beginning of the loan process if impounds are required, so there are no surprises at the closing table.
Impounds can be beneficial if you donâ€™t like having to write extra checks or keep track of when bills are due. However, if you’re short on cash or would be pulling the money from an investment account, you may be better off without them. It doesnâ€™t make sense to take money from an account thatâ€™s earning 5% to save .25% on your mortgage rate.
For any further impound or financing related questions, feel free to contact me.Chelsea Collier is a licensed home mortgage specialist in both Oregon and Washington, as well as a frequent contributing writer for OHM. Please don't hesitate to contact her with any questions you may have about financing (or refinancing) your home.