An impound account, sometimes referred to as a “Reserve Account” is when your property taxes and homeowners insurance get collected monthly along with your mortgage payment. In California, you have a choice as to whether or not you want an impound account, although some banks are now charging for choosing to not have one.
As with everything in real estate financing, there are advantages and disadvantages to opting for an impound account.
The advantage of getting your taxes and insurance collected monthly along with your mortgage payment is that you don’t have to worry about making a huge payment twice a year (or once a year in the case of insurance). You can write a check with the monthly portion directly to your lender for them to take care of it for you.
The disadvantage of having an impound account is that the money is going to the lender on a monthly basis, so these are not funds that would normally be in your interest-bearing savings account. The lender is making interest off of your money, not you.
Another disadvantage in choosing to have an impound account is that you must pay many months worth of property taxes upfront. This isn’t necessarily a disadvantage but can make your finances quite tight during a time when you have to pay for other closing costs and prepaid items upfront at Close of Escrow. The number of upfront months depends on the month in the year that you close. To give you a brief idea of how this changes:
- If your new loan’s 1st payment date is November, you must pay 8 months of property taxes upfront in escrow
- If your new loan’s 1st payment date is December, you must pay 9 months of property taxes upfront in escrow
- If your new loan’s 1st payment date is January, you must pay 4 months of property taxes upfront in escrow
- If your new loan’s 1st payment date is February, you must pay 5 months of property taxes upfront in escrow
Only if your 1st payment date is in April do you only have to pay 1 month upfront. But you can see how this can be a difficult thing for many people to pay for upfront. If it is difficult and if you do end up wanting an impound account, you can always set it up at a later date.
What I recommend to my clients that choose not to have an impound account is to create a separate savings account for this purpose only, where they close their eyes and put the monthly property tax amount directly into that savings account so that they don’t get shocked or surprised when the property tax bill is due.