Escrow/Impound Account Descriptions
Homeowner’s Insurance Impound: If one’s down payment is less than 20%, the buyer will be required to put 2 month’s worth of the annual homeowner’s insurance premium into an escrow account, otherwise the buyer will place 1 month into the account. The monthly mortgage payment will include 1/12 of the annual premium in the payment, which is kept in the escrow account until the annual premium is due. If one’s down payment is less than 20%, the buyer will have a two-month “cushion” in the escrow account. Cushions are allowable but limited under RESPA (Real Estate Settlement Procedures Act)); in other words, RESPA accepts the practice of the lender wanting to cushion the escrow account, but limits the amount of the cushion to a reasonable amount.
PMI Impound: Private Mortgage Insurance (PMI) protects the lender in the event that the borrower defaults on the mortgage loan. It is usually required if the borrower’s down payment is less than 20%. The borrower has to deposit 1-month’s worth of PMI premiums into the escrow account, depending on the lender.
Property Tax Impounds: These depend on three factors:
· In which state the property’s located and when the taxes are due
· Whether the property taxes are paid in arrears or in advance
· The month in which the transaction closes
In California, property taxes are paid semi-annually, with one payment in arrears and one in advance. A borrower’s monthly mortgage payment includes 1/6 of one’s semi-annual property tax. Therefore, the borrower needs to deposit the number of month’s worth of property taxes into the escrow account that will yield 6 months worth of property taxes in the account at the time that property taxes are due.
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