Recently I received a question from a client asking whether they should set up an impound account for their taxes and insurance. Impound is the same thing is escrowing so don’t be confused. Here is what I told him:
“As a lender we can set it up so that you pay your taxes every month (total taxes due per year divided into 12 equal payments). We hold that money and then when it is due we forward it to the government. This is the type of loan we have you set up for.
However, if you choose to pay your own taxes then you can certainly do that. However, the lender views this as an added layer of risk and sometimes will bump up the interest rate a bit to cover this risk. The risk being that if you’re not good with setting aside money every month for the semi-annual tax payment you’ll be late on your taxes or you stop making mortgage payments to pay taxes. Not paying your taxes over a period of time means the government then can attach a tax lien to the house. We are lending with the assumption that we’re the first lien holder but the government has power to get ahead of us. Hence if we have to sell the house to recover the loan then the government gets it taxes first before we can get our money to cover the loan.
I always recommend that clients set up an impound account with the lender and pay taxes on a monthly basis as part of the mortgage payment.
The same idea applies to your monthly homeowners insurance payment.â€