What is an impound account and how does it relate to escrow?

What is an impound account and how does it relate to escrow?

• A. An impound account collects funds for taxes and insurance; often called impound by lenders.
• B. A savings account for the borrower's discretionary use.
• C. A credit line used to pay monthly mortgage payments.
• D. An account used to hold closing costs until closing.

Answer: (A)

The key idea is that an impound account is a reserve the lender collects and holds to pay property taxes and homeowners insurance on the loan, so those bills aren’t missed. When you make your mortgage payment, a portion goes into this account (and sometimes the lender requires an initial deposit at closing) so there’s always enough money to cover taxes and insurance when they’re due. The term impound is what lenders often call this specific kind of escrow account focused on taxes and insurance, while escrow is the broader concept of setting aside funds to pay various third-party obligations. The other descriptions don’t fit because an impound/escrow fund isn’t for discretionary savings, isn’t a separate line of credit to cover monthly payments, and isn’t simply a place to hold closing costs for later.

The key idea is that an impound account is a reserve the lender collects and holds to pay property taxes and homeowners insurance on the loan, so those bills aren’t missed. When you make your mortgage payment, a portion goes into this account (and sometimes the lender requires an initial deposit at closing) so there’s always enough money to cover taxes and insurance when they’re due. The term impound is what lenders often call this specific kind of escrow account focused on taxes and insurance, while escrow is the broader concept of setting aside funds to pay various third-party obligations. The other descriptions don’t fit because an impound/escrow fund isn’t for discretionary savings, isn’t a separate line of credit to cover monthly payments, and isn’t simply a place to hold closing costs for later.