When you buy a home, you are responsible for paying property taxes to the local tax assessor. In most California counties, taxes are due in 2 equal installments twice per year. As an example – if you buy a $500,000 house you are looking at a little over $6,000 in annual property taxes.
The same goes for home insurance. If you have a mortgage loan on your property, you are required to have insurance to cover damage to your property in the event of a fire. Most insurance premiums are due once a year.
This amounts to a lot of money to come up with all at once. And that’s the reason some homebuyers choose ‘impounds.’ By ‘impounding’ your mortgage loan, you have the option to break your tax and/or insurance payments up into 12 equal payments and include them with your mortgage payment every month.
Your mortgage company sets these payments aside in what is called an impound or ’escrow’ account. When the tax installments and insurance premiums become due, your mortgage company will take the money that is sitting in your ‘impound’ account and use it to pay them on your behalf.
If you choose tax and insurance impounds, then for the life of your loan, as long as you continue to make your mortgage payment and renew your home insurance policy, your lender will continue to pay your taxes and insurance for you and you won’t have to come up with lump sums of money to the tax assessor or your insurance company to cover your premiums.
It is important to know that depending on the time of year your loan is closing, the lender will need to collect a number of months of taxes and/or insurance up front so that they have enough money to cover your tax and insurance bills later in the year when they are due. They never want your impound account balance to be zero, so they also require a cushion of two months reserves to remain in your Impound account at all times.
If you are buying or refinancing a home and have questions about tax or insurance impounds and whether they are the right option for you, talk to your local independent mortgage broker for guidance.
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