Westcoe Realtors, Riverside Ca…THIS is a good question, and one that almost every buyer who has an impound account has had to deal with over the years. So…let’s see if we can provide the answer that will explain why your monthly house payment can vary from year to year because of your impound account.
First, we will assume that you have a fixed rate loan. This means that your monthly house payment you make to the lender who gave you the loan is the same every month until the loan is paid, or you sell the house.
Secondly, before we can explain why your monthly payment may change from year to year, we need to first explain exactly what an impound account is.
An impound account is created so that you, the owner of a home, can make one payment every month, and that payment not only covers the loan payment referenced above, but also pays your homeowners insurance, and your annual property tax bill. In essence, your monthly payment is actually 3 payments…loan, insurance, and property taxes.
Now…a few facts about an impound account. An impound account is established when you get your loan to buy your house. If your down payment is less than 20% of the sales price, then in most cases, you are required to have an impound account. If your down payment is 20% or more, then having an impound account is voluntary.
Also, since your payment now includes the 3 items mentioned above, you need to know that your property taxes are paid twice per year (usually April and December), and your homeowners insurance is paid once per year, on the anniversary date of your purchase.
Now we can explain why your payment can change from year to year.
When the lender gets your monthly payment, the bulk of it goes towards your loan payment. However, the part of your monthly payment that represents the insurance and property taxes gets set aside in your “impound account” to build-up until the those bills need to be paid. For example, if your total monthly payment is $2,000, and your loan payment is $1,500, and the insurance portion is $100, and the property taxes are $400, then the “extra” $500 is set aside in your account so that when the property taxes are due (April & December), or the insurance is due, there is enough money in your account to pay these bills.
The most important thing to understand here is that your lender uses YOUR money to pay these insurance and tax bills, not THEIR money. That means that there needs to be enough money in your “impound account” to pay these bills when they are due…with some left over as a pad for the lender in case you are late with a payment, or miss a payment.
Lastly, understand that when you first closed escrow on your home, and established your impound account, the account was “seeded” with your money to make sure there was enough available to pay your first round of taxes and insurance…and this original amount needed was estimated by the lender.
So…here is typically what happens with an impound account…and if you have ever tried to steer a boat, you will understand what we are saying next.
Since the lender estimated the original amount needed to establish your impound account, sometimes they estimate too low…or too high. If they estimated too low, then when the time comes to make your tax and insurance payments, the lender gets scared the balance of your account is too low, so they send you a letter telling you they are raising your monthly payment to get more money in your impound account. Remember, they pay with your money, not theirs, so they want to make sure they have plenty of your money in the account.
However, about a year later, their computer models now say you have too much money in your account, so they send you a refund of the overage, and reduce your payment, since they now have too much. Then, about a year after that, they now think they have too little again, and they send you another letter saying there is an impound shortage, and the payment needs to go up again. This merry-go-round can continue for the life of your loan if things get really screwed up.
Now, to be fair, your monthly payment may rise some over the years because of annual increases in both your insurance and property taxes…but most of the time, when you have an impound account, you are destined for these annual “course corrections” (like steering the boat) as your lender tries to find some sort of payment balance.
Hence, the ever-changing payment that comes with an impound account.
Not to confuse the issue, but if you are tired of all these changes, and want to eliminate your impound account and make these payments on your own, you can usually do that once the equity in your home is 20% or more…just check with your lender.
Hope this helps you understand why your “fixed” monthly house payment can change every year if you have an impound account.
Take care, and as always, thanks for reading our blog posts.