When you purchase a home you have an option to use an impound account. This allows you to pay your property taxes and home insurance directly to your lender together with your mortgage payment. Some lenders will require impound accounts with smaller down payments, but as you build equity you can refinance and adjust how you want to pay your property taxes and insurance whether separately or together with an impound account. So, what are the pro’s and con’s of using one?
There are several benefits of using an impound account. Property taxes here on the Monterey Peninsula are paid biannually, and if you don’t use an impound account you have to budget for thousands of dollars out of pocket twice a year. An impound account requires you to pay monthly toward those taxes, so you don’t really have to think about it. It’s kind of like automating property taxes and insurance. You write one check or make one direct deposit every month and it covers your payment, taxes, and insurance. I like having systems in place to make my life easier, so I definitely see the value in impound accounts, but there is a valid argument for choosing not to have them.
When you set up impound accounts, the lender will require you to pre-load several months of taxes and insurance into the impound account, making your closing costs much higher than if you were to purchase without impound accounts. Even after you put several months of taxes and insurance into your impound account when you make your purchase, you still have to continue paying taxes and insurance every month, so thousands of dollars are sitting in the account at all times. This means those funds are not generating interest for you. Without impound accounts, you could be investing those funds instead. Two good arguments, it just depends on your preference and what you feel comfortable with. We are refinancing our house now and removing our impound account so we can invest the money and have less cash out of pocket on our closing costs. We’ll budget for property taxes and insurance separately and deal with the hassle of making those payments separately. What strategy do you prefer?
Find a list of other key terms to know in the real estate process here!