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Approximately 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 funds in the buyer's name to ensure certain payments are made on time – typically home insurance and property taxes. This can help reduce lenders' liability and risk and provide buyers with access to better financing options.
What is an escrow or garnishment account? It is necessary? More importantly, how do you cancel an escrow or impound account if you don't really need it? This article will address all of these questions to help you determine whether or not escrow is a good move for you.
What is an Escrow or Impound Account?
An escrow account – sometimes called an impound account – is a type of account set up to manage expenses associated with large purchases, such as buying a home.
Escrow accounts are typically managed by a third party. Depending on the terms of the sale, escrow accounts can help ensure a smooth transaction.
For example, if a seller agrees to cover the fees required to renovate a home, the funds for those costs may be placed in an escrow account. This protects both parties and ensures that the obligations arising from 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, a portion of your payment is placed into an escrow account for future expenses such as property taxes or insurance premiums. Setting money aside each month allows you to spread out these expenses and save in advance, making them easier to manage.
While escrow accounts are common when purchasing a home, they are not limited to this. Other types of assets, such as purchasing 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 being processed.
Why You May Need an Escrow or Impound Account
Depending on the purchase you are making, there are different requirements that will determine whether or not you need an escrow or impound account.
A garnishment account is used for things that need to be delivered. This can be part of a purchase agreement, but is not limited to it. If your car has been impounded or you owe taxes, a court may require you to set up an impound account to hold the funds until all legal proceedings are complete.
An escrow account can also help you budget for large expenses, such as property taxes, which can cost thousands of dollars each year. Depending on your mortgage terms, some lenders may require you to have a property tax escrow account and deposit money into it each month.
This helps you as the homeowner spread out payments over a period of time, while also helping the mortgage servicer mitigate the risk that you won't be able to make a payment.
Do you need to have an escrow or impound account?
Some loans or sales contracts may require the maintenance of an escrow or lien account. This way, a lender can ensure you can keep up with your payments.
Most servicers require an escrow account for mortgages with a down payment of less than 20%. This also applies to certain types of government-backed loans, such as mortgages issued by the U.S. Department of Agriculture or the Federal Housing Authority.
An impound account may also be required if your vehicle has been impounded by the police. Courts may use them when there is a legal proceeding to collect debts secured by personal property.
Escrow and impound accounts are not always necessary. This applies to homeowners with exceptional credit or who are able to make a significant down payment on a home. While an escrow account may not be necessary, it can still help you manage your money.
How to close an escrow or impound account
If you don't need an escrow or impound account, you can choose to cancel it. There are good reasons for it. This doesn't eliminate your property taxes, but it does mean you don't have to put money away in an escrow account every month.
This can provide some financial benefits, such as lowering your monthly mortgage payment. The money saved could be moved to a high-interest savings account or another short-term savings vehicle, such as a certificate of deposit.
If you want to cancel your account, your lender or mortgage servicer may require you to follow a formal process. To do this, you must apply for an escrow waiver, which tells your lender that you accept responsibility for covering property taxes and insurance on your home.
Your lender may ask for proof that you have made all required payments, such as: B. the payment of your insurance premium. You may also need a loan-to-value ratio of less than 80% and no history of missed or late payments.
Not having an escrow account can also involve higher costs. Lack of an escrow account can increase risk for lenders. You may have to pay higher fees for the lender to take on this risk.
Although closing a trust or impound account offers advantages, it is also a useful money management tool. It helps you spread out large payments over time while providing buyers, sellers and lenders with some protection on large purchases.
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