How Does an Escrow Impound Account Work?
An escrow impound account is similar to a Piggybank for your Property Taxes (Semi-Annual in California) & Homeowner’s Insurance. Lenders make this account a requirement for home buyers that are using less than 10% for a Down Payment. The lender will take the burden off your hands by making the Property Tax Payments to the County Assessor and Homeowner’s Insurance Payment to your insurance company when they come due. Lenders break down the property taxes & insurance into 12 payments and add the result to your monthly mortgage payment. This is called an Escrow Payment, which simply means your combined taxes & insurance payment. Every time you make a payment to the lender, the escrow money will be placed in your Escrow “Piggybank” Account to make sure those obligations are paid on time. This protects the lender and yourself from uninsured losses & tax liens.
Property Taxes will fluctuate on an annual basis based on your county’s property tax assessments, consequently this will cause your monthly escrow payment to fluctuate as well.
For Purchases, the lender requires for the Escrow “Piggybank” Account to be funded by the buyer at closing. The funding requirement will depend on the lender as there is a minimum reserve requirement for property taxes & insurance. At times, there may be Broker/Lender Credit Surplus and may be used to cover some if not all of the funding requirements. You may find these requirements on Page 2 Section G of your Loan Estimate.
In conclusion, using an escrow account and not having to make these payments should be one less thing to worry about.