What Is an Insurance Impound?

What Is an Insurance Impound?

Once you begin the mortgage process you will probably come across the term insurance impound. This is a tool used by the bank to collect and hold your funds for your home insurance payments. While this might be beneficial for some homeowners, you might want to take a closer look to see if this would benefit you or turn out to be unnecessary.

Why is the lender interested in insurance?

If you are not able to repay the mortgage loan, the lender will foreclose and repossess the home in the hope of selling it to get back the remaining balance you could not repay. If the home happens to be damaged though, the lender might not be able to be able to sell the home for the price needed to recover what they loaned to you. Because of this, your lender is very interested in making sure the home is protected in case of damage, which is why home insurance is required.

How does an impound account work?

So what will happen if you don’t pay for insurance? Sometimes homeowners accidentally forget to pay their insurance premiums, and others become unable to afford them due to stress on finances. The lender won’t like the risk that this involves, so they might require the homeowner to set up what is called an impound account for your insurance premiums. Each year the insurance company will calculate the monthly amount you will need to pay in addition to your mortgage payment (rather than one lump sum), and this amount gets stored in the impound account. The lender will then pay the insurance company with those funds whenever the premiums are due. Lenders will also create a buffer via an advance deposit of about two or three months of premiums at the start. This way, if you happen to fall behind on your payments, there is still a cushion in the account to continue paying for insurance.

Many homeowners like having the ability to spread out what is usually one lump sum of insurance premium into smaller monthly payments throughout the year, but many others prefer not to pre-pay the premiums so that they can earn interest in their accounts from those funds until it’s time for the insurance company to be paid. The problem is, some homeowners are not as disciplined with their finances to set aside those funds. Sometimes lenders also make having an impound account a condition of your mortgage loan, while others might even offer a better interest rate on the loan if you open an impound account.

Who Does An Impound Account Benefit Most?

If you have no trouble organizing your finances and setting aside amounts each month on your own, an impound account is probably unnecessary for you. However, if you won’t earn much interest by keeping the funds yourself, and your lender is offering a better rate on your loan if you choose to set up an impound account, that might be worth investigating.

If you have a difficult time keeping up with your bills, impound accounts can be very helpful because it’s one less thing to keep track of. You don’t want to have your policy cancelled by coming up short at the time the insurance premium is due.

Categorized as Insurance


Leave a comment

Your email address will not be published.