Many a refinancing homeowners is unpleasantly surprised to find that he or she is getting "impounded" by a new mortgage company. What does "impounded" mean? They aren't being towed; they aren't being locked up--just what is being done to these borrowers?
- Obama announces FHA loans to get less expensive
- FHA to reduce annual mortgage insurance premiums
- 800,000 FHA borrowers projected to benefit from changes
- FHA Streamline Refinance makes it easy to refinance
Impound or escrow accounts are not usually required by bad credit or sub-prime mortgage lenders, but most other lenders make you have them if your loan balance exceeds 80% of the value of your home. So even if you put 20% down when you bought your house, if property values have dropped, you may have to get an impound account.
Lenders love impound accounts because they make your loan less risky to them (but more costly to you). When you close on your refinance, you have to prepay property taxes and homeowners' insurance into an impound or escrow account. And every month, you pay a pro-rated portion of taxes and insurance to your lender, which is added to your monthly payment. Your lender then pays the annual, quarterly, or semi-annual installments on your behalf. This makes your loan safer because your lender knows that your taxes will be paid and your insurance kept up.
It's more expensive for you because you have to come up with more money to close your mortgage refinance, and because the lenders like to keep a surplus in your impound account. So hundreds or even thousands of dollars--your dollars--can be tied up and out of your reach.
So, how much of your money can your lender keep on ice in an impound account? Laws vary from state to state, but requiring an excessive escrow balance is not legal. Many states allow a cushion which equals one or two months of escrow payments. In fact, a lender called Fleet Bank got into a lot of trouble a number of years ago for requiring more than 6 months' escrow and had to refund millions of dollars to its customers.
If your escrow account ends up short (perhaps your property taxes increase wildly) and the lender advances funds to pay taxes and/or insurance, then it has the right to ask you to repay those funds. The length of time allowed for you to come up with the cash varies. By law, you should receive an annual statement which analyzes your escrow account to make sure the right amount is being impounded. If you think you're paying too much, check with your state's requirements