Escrow

What is an impound account?

It is a special bank account held by the lender to collect monthly payments from the borrower to pay property taxes, mortgage insurance, and hazard insurance. These accounts also are called escrow or reserve accounts. Lenders like to set up impound accounts to ensure the property taxes and insurance will be paid on time. They typically also collect a two-month cushion for taxes and insurance at the closing. A few states require the lender to pay interest on funds held in these accounts.

Are impound accounts required for all mortgage loans?

They can typically be waived on a conventional loan if the loan amount is 80 percent or less of the purchase price. But the lender might charge you an additional 1/4 point for this option to waive the escrow.

One way to avoid an impound account on an owner-occupied mortgage is to raise your down payment amount slightly. The exact amount necessary to avoid the escrow will vary with the lender.

In some states, lenders let buyers set up separate accounts in which they place specific funds and then pay the insurance and property taxes themselves. These are called pledge accounts, and they must be set up before you close on the home.

An impound account can usually be dropped on an owner-occupied loan once the loan-to-value ratio equals 80 percent or less. But restrictions apply: payments will have to be current and your record of making on-time payments pretty solid. Contact your lender if you meet these requirements and want to drop your impound account.

Are property taxes deductible?

Yes. Like the mortgage interest paid on a home loan, property taxes are fully deductible from your income. You may deduct them every year on your primary residence, second home and other investment properties.

However, escrow money held for property taxes cannot be deducted until the money is actually used to pay the property taxes.