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What Is an Impound Account?

Malcolm Tatum
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Updated: May 17, 2024
Views: 6,314
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Impound accounts are special accounts established by lenders to support homeowners in the process of making sure funds are set aside for the payment of property taxes and the maintenance of homeowner insurance on those properties for the duration of the mortgage. Typically, this process involves pro-rating the amount of taxes and insurance premiums for each annual period, then notifying the owner of an amount to pay above and beyond that portion of the monthly mortgage payment that goes to retire a portion of the principal and interest of the actual loan. Use of an impound account not only helps the homeowner in managing these two important expenses, but also helps decrease the risk lenders assume when approving mortgages, at least in terms of protecting the lender in the event that a fire or other natural disaster destroys the home.

With a typical impound account, the lender works with insurance companies and tax officials to asses the property along with any structures that may be on the real estate. After determining the value of the property and allowing for other factors that the insurance provider considers relevant, the annual cost of homeowners insurance is pro-rated, making it possible to identify a specific amount per month for the homeowner to forward to the lender with the basic mortgage payment. The collected funds are held in an escrow or impound account until the insurance payment is due; at that time, the funds are forwarded to the insurance provider and the property remains covered.

In like manner, the management of the impound account calls for pro-rating the property taxes due for the upcoming year, and breaking down that amount into monthly installments that are remitted along with the basic mortgage payment each month. As with the funds for home insurance, the money collected to pay property taxes is housed in the impound account until payment of those taxes comes due. At that point, the lender pays those taxes on behalf of the homeowner, ensuring that the property remains in good standing with local tax authorities.

Both homeowners and lenders benefit from the use of an impound account approach. Homeowners have the benefit of being able to incrementally pay home insurance premiums and property taxes, rather than making arrangements to pay lump sums once or twice each calendar year. As a budgeting aid, this method can go a long way toward alleviating stress on the household budget. Lenders also benefit from the use of an impound account as the payment of taxes helps to protect their investment in the homeowner, and also ensures that the homeowners insurance is sufficient to settle any outstanding mortgage balance should the home be destroyed by a covered event. From this perspective, both the homeowner and the lender are protected from certain adverse circumstances that could arise, allowing both to recover without any permanent financial damage.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

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Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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