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An impound account is set up by the bank when a person purchases or refinances a home. The borrower pays the bank a monthly amount equal to 1/12 the annual cost of taxes, insurance, and/or mortgage insurance (as applicable) in addition to their normal mortgage payment. The bank holds these funds until property taxes and insurance are due and then pays them on the borrowers’ behalf.

The bank will review your impound account annually to make sure that they are not collecting too much or too little of your funds.  Your monthly impound amount will be adjusted accordingly, and any overage will be refunded to you.

For loan amounts greater than 80% of the purchase price and/or appraised value, an impound account may be mandatory.  This varies based on each individual lender's guidelines.

The Benefit
Many borrowers feel relieved to not have to come up with a large sum of money once (or twice) a year to pay taxes and insurance. Also, many lenders give beneficial pricing for setting up an impound account.

The Disadvantage
Based on when escrow closes and when insurance premiums are due, the borrower may need to supplement the impound account.