Through out all of the changes going on in Washington DC as we enter March, in the mortgage industry there are several terms and parts of the process that have not changed at all, and that our brokers’ clients need to know. Two of these are “impounds” and “escrow accounts.” They have become seemingly scary words in the process of taking out a mortgage, as the broker is referring to an impound account, also known as an escrow account. And yes, brokers know what they are, but it can be helpful to have a reminder.

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Brokers tell their clients that impounds are accounts managed by a third-party, typically a loan servicer, to collect and disperse funds on behalf of the homeowner and lender. In short, homeowners pay money into the escrow account at closing (and each month after that with their mortgage payment), and when property taxes and insurance are due, the money is sent on to the tax collector or insurance company. So instead of paying property taxes twice a year, or homeowners’ insurance once annually, you pay a considerably smaller installment amount each month instead.

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Borrowers must also pay an “initial escrow deposit” at closing, which will vary greatly based on the month you close, and where the property is located. An impound account greatly benefits the lender that you broker the loan too because they know your client’s property taxes will be paid on time, and that the homeowner’s insurance won’t lapse as might be the case if it was required a some lump sum.

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Many seem to think lenders require impounds so they can earn interest on your client’s money, but it’s really to protect their interest in the property. Impound accounts can also benefit your borrowers because the money is collected gradually over time, so there isn’t that big, unexpected hit when taxes or insurance are due. And talk to your AE about earning interest on the impound account. Some states require lenders to pay homeowners interest on their impound account balances. In California for example, it is customary for mortgage escrow accounts to earn interest. Each year your client should receive a tax form that shows what they were paid and what is owed from a tax perspective as a result.

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The good news is, if your client initially sets up an escrow account, you may be able to help them get it removed later down the line. Simply contact the loan servicer and ask them to review the account. Regardless of whether your client goes with impounds or decides to waive them, it is their responsibility to ensure that the property taxes and insurance are paid on time. So always remind them to keep an eye on their escrow account and keep good records of their taxes and insurance! And contact your Orion AE if you have any questions.