What are impounds?
An impound account, also known as an escrow account is required on VA and FHA loans but is optional on all Conventional loans with a minimum of 5% down. An impound account is an account set up to include taxes and insurance within the monthly mortgage payment. When the impound account is initiated (usually when a loan is closed), the lender will collect a few months of taxes and insurance in advance to have in the account as impound reserves. The impound reserves are required to ensure the lender has more than enough funds in the account to pay the property taxes and insurance on behalf of the borrower(s) whenever they become due. The amount collected in advance all depends on what month of the year the loan closes. The borrower will also pay a portion of their taxes and insurance to their escrow account as a monthly installment.
Towards the end of each year, the lender will complete an audit of the escrow/impound account to ensure they are not over collecting or under collecting. If there is any surplus of funds, the funds will be refunded to the borrower(s). Many borrower(s) opt to waive impounds in an effort to have a lower monthly payment however, they will be required to pay their taxes and insurance on their own whenever they are due.