The term impound refers to an account effectively retained by mortgage companies that help them obtain payments from mortgage holders. These payments may be related to insurance premiums, property taxes, private mortgages, etc. These payments are levied on the mortgage holders as supplemental to their mortgage loans. However, it is important to recognize that these payments are not directly related to the mortgages owed by the mortgage holders. The funds collected through these payments are typically held in escrow with the objective of paying third parties on behalf of the mortgagor.
Before we reach any conclusive remarks on what an impound actually refers to, it is important to understand the concept of mortgages. A mortgage is essentially a type of home loan whereas the borrower acquires a home loan from a lending institution in order to purchase or maintain a piece of residential property. Now, in a mortgage transaction, the borrower is allowed to make periodic payments to the financial institution as repayment. However, it should be noted that there may be more to these mortgages than the simple process of borrowing and repaying. When a prospective home buyer acquires a mortgage loan from a lending institution, they are required to pay an upfront amount as a down payment. Now, impound accounts are typically maintained by the lenders in case of borrowers that make down payments of less than 20% of the total value of the property in question.
It is also important to realize that the primary purpose of impound accounts is to safeguard the interests of the lending institution.
In the case of mortgages acquired for the purchase of real estate, the borrowers that offer lower down payments are considered high-risk borrowers. Here, an impound account is maintained by the lenders in order to make sure that the borrower does not end up losing the property due to the inability to pay any liens, taxes, etc. The lending institutions make sure of this themselves by paying for such liens and taxes from such impound accounts.
Although impound accounts typically serve the purpose of protecting the lender, they can be of immense help to the mortgage holder as well. Impound accounts force the borrowers to pay for relevant housing expenses throughout the year and allow them to avoid the burden of paying large amounts once or twice a year. As per federal regulations, impound accounts are subject to yearly revisions by the lending institutions.
