What Is An Escrow Or Impound Account And How To Cancel It?

Around 80% of mortgage borrowers in the United States have an escrow or impound account. In fact, these accounts are required by some lenders.

These accounts hold money on behalf of the buyer to ensure certain payments are made on time - typically homeowners insurance and property taxes. This can help reduce liability and risk lenders take on, giving buyers access to better financing options.

What is an escrow or impound account? Is it required? More importantly, how do you cancel an escrow or impound account if you don’t actually need it? This article will dive into all of those questions to help you figure out whether or not an escrow account is a good move for you.

What Is An Escrow Or Impound Account?

An escrow account – also sometimes referred to as an impound account – is a type of account that’s set up to manage expenses that accompany large purchases, like buying a home.

Escrow accounts are typically managed by a third party. Depending on the terms of sale, escrow accounts can help ensure things go smoothly.

For example, if a seller agrees to cover fees needed to make an improvement on a home, the funds for that expense might be held in escrow. This protects both parties, ensuring the obligations of the sale are met before the funds are released.

If you have an escrow account, it will be included in your monthly mortgage payment. Each month, part of your payment is sent to an escrow account for a future expense like property taxes or insurance premiums. Setting aside funds each month can help you break up these expenses and save for them in advance, making them easier to manage.

While escrow accounts are common for purchasing a home, they aren’t limited to that. Other types of assets like buying a vehicle or purchasing something from a supplier may require a type of escrow account called an impound account. This type of account can be a sign of good faith for a transaction that is processing.

Why You Might Need An Escrow Or Impound Account

Depending on the purchase you're making, there are different requirements that will determine whether or not you need an escrow or impound account.

An impound account is used for things that require delivery. This can be part of a purchase agreement but it isn’t limited to that. If your car has been impounded or you owe back taxes, a court may require an impound account to be set up to hold onto the funds until all legal proceedings are finalized.

An escrow account can also help you budget for a large expense, such as property taxes, which can cost thousands of dollars each year. Depending on your mortgage terms, some lenders may require that you have an escrow account for property taxes and deposit money into it each month.

This helps you, the homeowner, break up payments over a period of time while helping the mortgage servicer mitigate any risk that you will be unable to make a payment.

Are You Required To Have An Escrow Or Impound Account?

Some loans or purchase agreements may require that you maintain an escrow or impound account. This is a way for a lender to ensure you’re able to keep up with your payments.

For mortgages with less than a 20% down payment, an escrow account is required by most service providers. This is also the case for certain types of government-backed loans, such as mortgages issued by the U.S. Department of Agriculture or Federal Housing Authority.

An impound account may also be required if your vehicle has been impounded by the police. Courts can utilize them if there is a legal proceeding to collect debt that’s been collateralized by personal property.

Escrow and impound accounts are not always required. This is true for homeowners with exceptional credit or who are able to make a substantial down payment on a home. That said, while an escrow account may not be required, can still help you manage your money.

How To Cancel An Escrow Or Impound Account

If you don’t need an escrow or impound account, you may decide to cancel it. There are good reasons for doing this. While it won't eliminate your property taxes, it means you don’t have to set aside funds in escrow each month.

This can have some financial advantages, such as lowering your monthly mortgage payment. The money you save could be reallocated toward a high-yield savings account or other short-term savings vehicle, like a certificate of deposit.

If you wish to cancel your account, your lender or mortgage service might ask you to follow a formal process. This entails obtaining an escrow waiver, which lets your lender know that you’re taking responsibility to cover the property taxes and insurance for your home.

Your lender may request proof that you can meet all obligatory payments, like paying your insurance premium. You may also require a loan-to-value ratio of less than 80% and no prior history of missed or late payments.

Waiving escrow may come with some higher costs too. Not having an escrow account can increase the risk for lenders. You may be asked to pay higher fees for the lender to assume this risk.

While there are benefits to canceling an escrow or impound account, it is a useful money management tool. It helps you break up large payments over time while it can offer a layer of protection for buyers, sellers, and lenders when making a large purchase.