Is impound the same as escrow?
No, impound is not the same as escrow. While they both involve holding funds for specific purposes, impound typically refers to the funds held by a lender for property taxes and insurance payments, while escrow is a third-party account where funds are held for a real estate transaction.
When it comes to real estate transactions and loans, there can often be confusion between the terms “impound” and “escrow.” Both terms refer to the holding of funds for specific purposes, but they are used in different contexts. It is important to understand the distinctions between impound and escrow to avoid any misunderstandings or confusion. Let’s delve deeper into these concepts and explore their similarities and differences.
Impound accounts, also known as escrow accounts, are required by many lenders when financing a home purchase. These accounts are used to collect and hold funds for property taxes, homeowners insurance, and possibly other items such as mortgage insurance and homeowners association fees. The lender collects a portion of these expenses each month as part of the borrower’s mortgage payment and holds the funds in the impound account. When the bills come due, the lender pays them on the borrower’s behalf using the funds in the impound account.
Escrow, on the other hand, refers to a neutral third-party account used in real estate transactions to hold funds and documents until the transaction is complete. The escrow agent, often a title company, acts as a neutral intermediary between the buyer and seller, ensuring that both parties fulfill their obligations and that the transaction proceeds smoothly. The escrow account holds the buyer’s earnest money deposit, closing costs, and any other funds related to the purchase until all conditions are met and the property changes hands.
While impound accounts and escrow accounts serve similar purposes of holding funds for specific uses, they are distinct in their functions and applications. Understanding the differences between impound and escrow can help home buyers and sellers navigate the complexities of real estate transactions and financing more effectively.
FAQs:
1. What types of funds are typically held in an impound account?
In an impound account, funds are typically held for property taxes, homeowners insurance, mortgage insurance, and homeowners association fees.
2. Who manages the funds in an impound account?
The lender manages the funds in an impound account, collecting them as part of the borrower’s monthly mortgage payment and using them to pay the borrower’s expenses when they come due.
3. How is an impound account different from an escrow account?
An impound account is typically used by lenders to hold funds for property-related expenses, while an escrow account is a neutral third-party account used in real estate transactions to hold funds and documents until the transaction is complete.
4. Are impound and escrow accounts required for every real estate transaction?
Impound accounts are often required by lenders for home purchases, while escrow accounts are typically used in real estate transactions to ensure a smooth and secure transfer of ownership.
5. Can borrowers choose not to have an impound account?
Some borrowers may have the option to waive an impound account if they meet certain criteria, such as making a down payment of a certain percentage or having a good credit score.
6. How are impound and escrow accounts funded?
Impound accounts are funded through the borrower’s monthly mortgage payments, while escrow accounts are funded by the buyer’s earnest money deposit and closing costs in a real estate transaction.
7. Who oversees the escrow process in a real estate transaction?
An escrow agent, often a title company, oversees the escrow process in a real estate transaction, acting as a neutral intermediary between the buyer and seller to ensure the transaction proceeds smoothly.
8. Are impound and escrow accounts regulated by law?
Impound and escrow accounts are subject to various regulations and laws to protect the interests of all parties involved in real estate transactions and financing.
9. Can funds in an impound account be used for purposes other than property-related expenses?
Funds in an impound account are typically designated for property-related expenses such as taxes and insurance and cannot be used for other purposes without the lender’s approval.
10. How often are impound accounts reviewed and adjusted?
Lenders typically review impound accounts annually to ensure that they are collecting enough funds to cover the borrower’s expenses and may adjust the monthly payment accordingly.
11. What happens if there are funds left in an impound account at the end of the year?
If there are funds left in an impound account at the end of the year after all expenses have been paid, the lender may refund the excess funds to the borrower or apply them to future payments.
12. Can borrowers change or cancel their impound accounts?
Borrowers may be able to change or cancel their impound accounts under certain circumstances, such as paying off their mortgage or meeting specific requirements set by the lender. It is important to consult with the lender to understand the options available regarding impound accounts.