Hi, I’m Mark and I teach the Loan Signing System.
When you’re doing a loan signing, the borrower may have questions about their impound account.
In this blog, you’ll learn the basics of what an impound account is.
First and foremost, an impound account and an escrow account are the exact same thing. One can say that their taxes and insurance are impounded. Or they can say they have an escrow account for their taxes and insurance.
So what is an escrow account or impound account? Before I can answer that, it’s important to understand how property taxes and homeowners insurance are billed.
Let's start with taxes. Every homeowner in America has to pay property taxes so the municipality can pay for local, roads schools, fire departments etc.
Property taxes are due twice a year and the homeowner is the required to pay based off a percentage of the value of their home. So let’s just say that property taxes are 1.2% of home value and the home value is $100,000. There would be a $1,200 tax bill due for that year.
The important thing to note is that the tax bill typically is due twice a year. So you would have two payments of $600 each year.
And there are some people that will save $100 per month on their own and pay the tax bill twice a year.
Same with homeowners insurance, or also know as fire or hazard insurance. The lender wants to make sure that the home they are lending against is insured in case of a fire or any other type of damage so that their investment is protected. No different than why you insure your car, except homeowners insurance premium is usually due once a year.
And just like the tax bill, some people will save for the insurance bill pay the annual premium when it comes due.
Pretty simple, right?
However, some people don't like to put aside money on their own for bills that are due once or twice a year.
And that is how an impound account or escrow account came to be. The bank created a simple way for the borrower to give them the money that is due for taxes and insurance. And when the tax bill or insurance bill is due, the bank will actually pay the tax bill and insurance bill on the borrower’s behalf.
So, the easiest way to understand an escrow account is that it is simply a savings account for taxes and insurance. That's it.
So how does the bank determine how much is set aside each month in the impound account and how much a borrower’s monthly payment will be?
It's easy. Essentially, they take the annual estimated tax bill and annual insurance premium and divide it by the 12 months that are in a year. Then they add that amount to the principal and interest payment, and that is the total amount the borrower owes the bank every month. The monthly payment will include principal, interest, taxes and insurance, or also know as PITI.
So in our previous example, property taxes are $1200 a year, divided by 12 is $100 per month.
Then let's say homeowners insurance is $600 a year, divided by 12 and that is $50 dollars a month.
So the bank would add $150 to the principal and interest payment to get their TOTAL monthly payment.
During a loan signing, the Note will include the principal and interest part of the payment and generally will not include taxes and insurance. However, the Payment Letter will include principal, interest, taxes and insurance, or PITI.
This is why in my Loan Signing System, I recommend pulling both the Note and the Payment Letter to the front of the loan docs in your signing since this is one of the two things that borrowers want to confirm.
And now you know what an escrow and impound account is.
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About the Author
Mark Wills is the course instructor of the top rated Loan Signing System agent training course. He has been an active professional loan signing agent for nearly 15 years and owns a loan signing service that does thousands of signings a year.