Can I Cancel My Impound Account in California?

Getting a mortgage loan in California often means having an "impound account" (also known as a mortgage escrow account). A California impound account is designed to hold extra money to cover essential property expenses, such as property taxes, homeowners' insurance, private mortgage insurance (PMI), homeowners' association (HOA) dues, and more. By collecting and disbursing funds for these important bills, impound accounts protect both the lender and borrower, ensuring on-time tax and insurance payments while helping borrowers budget their money.

California law strictly regulates when lenders can require impound accounts. And homeowners sometimes get the right to cancel or opt out of an impound account under certain conditions. This article explains California impound account requirements, what's included, when lenders can require escrow, and how to close or cancel an impound account.

What Is a California Mortgage Impound Account?

With some mortgage loans, the servicer collects extra money from the borrower each month, over and above the principal and interest owed. The servicer puts the additional money in a particular account. In some states, including California, this kind of account is called an "impound account." Elsewhere, this type of account is known as a mortgage escrow account.

What's Included in California Impound Accounts?

California impound accounts collect and hold funds to pay property taxes and homeowners' insurance. Sometimes, the servicer also collects funds to pay PMI, HOA dues, flood insurance, supplemental property taxes, or other property-related expenses. These items are all known as "escrow items." Having an impound account ensures that money is available to cover these important costs.

How Do Mortgage Impound Accounts Work?

Generally, you must pay one-twelfth of the estimated cost of the escrow items each month. But because these amounts can change, you usually have to put some additional money into the account, typically around two months' worth of escrow payments. The servicer then uses this money, called a "cushion," to pay for unexpected increases in property taxes, homeowners' insurance, or other escrow items.

For example, suppose you have an impound account for property taxes and homeowners' insurance. Together, these items cost you $9,000 each year. The servicer will require you to pay $750 each month in addition to your principal and interest, and perhaps a bit more to provide a cushion.

Are Impound Accounts Mandatory in California?

In California, your lender can require you to have an impound account for your mortgage loan under certain conditions. (Cal. Civil Code § 2954 (2025).)

• a state or federal regulatory authority requires the account
• the loan is made, guaranteed, or insured by a state or federal governmental lending or insuring agency, like FHA or VA
• the borrower fails to pay two consecutive tax installments on the property prior to the delinquency date for such payments
• the original principal amount of the loan is 90% or more of the sale price or appraised value
• the property secures two or more loans, and the combined principal amount exceeds 80% of the appraised value of the property
• the loan is made in compliance with the requirements for higher-priced mortgage loans established in Regulation Z, whether or not the loan is a higher-priced mortgage loan (a "higher-priced" mortgage loan is a loan that has a rate based on interest, points, and other loan terms that is higher than levels established by the Consumer Financial Protection Bureau), or
• the loan is refinanced or modified in connection with a lender's homeownership preservation program or a lender's participation in such a program sponsored by a federal, state, or local government authority or a nonprofit organization. (Cal. Civil Code § 2954 (2025).)

If the mortgage loan meets one of these requirements, the lender can require an impound account. However, if the loan doesn't meet any of these conditions, the lender can't require an impound account. But the lender and borrower may mutually agree to set up an impound account if, before the borrower signs the loan or sale agreement, the lender gives the borrower a statement in writing that says establishing an impound account isn't required and whether interest will be paid on the funds in such an account.

Impound Account Interest Requirements in California

Under California law, servicers must pay interest on funds held in impound accounts. The interest on escrowed amounts must be at the rate of at least 2% simple interest per year. The interest must be credited to the borrower's account annually or upon the termination of the account, whichever is earlier. This law applies to lenders that make loans or acquire obligations secured by one- to four-family residential properties in California. (Cal. Civil Code § 2954.8 (2025).)

What Happens If You Don't Pay Property Taxes Without an Impound Account

Lenders use an impound account to address two main concerns: To make sure that property damage is covered by insurance and to ensure the property isn't lost to a tax sale.

If you don't have an impound account and fail to pay the taxes or insurance premiums, you might lose the home to a tax sale or be unable to pay for repairs if the house is damaged. But it's more likely that the servicer will advance amounts to pay for these items. You'll then have to repay the servicer. If you don't reimburse the servicer, you might face a foreclosure. Homeowners who opt out of impound accounts need to be diligent about paying property taxes and homeowners' insurance on time, and ensure they budget for these expenses throughout the year to avoid penalties and the potential loss of their home.

How to Cancel Your California Impound (Escrow) Account

If you have a government-backed loan, like an FHA-insured or VA-guaranteed loan, or a higher-priced mortgage loan, you normally don't get the option to cancel your impound account. But you might be able to cancel the account if you have a conventional loan and meet certain criteria.

Eligibility Requirements to Close an Impound Account

Lenders have different rules for canceling an impound account. Usually, the mortgage must be at least one year old with no late payments, and no taxes or insurance payments are due within the next month or two.

Call your loan servicer to find out whether you can cancel your impound account.

Pros and Cons of Closing Your Escrow Account

Before you decide to cancel your impound account, consider whether that's a good idea. An impound account takes the hassle out of budgeting for property taxes and insurance payments. It's easy to save money to pay taxes and insurance when you contribute small amounts toward them with each mortgage payment. Plus, the servicer takes on the responsibility of paying the bills. Borrowers sometimes find it more convenient to let the servicer deal with this paperwork.

When to Get Legal Help

If you're considering canceling your impound account or are unsure whether your lender can require one under California law, it's a good idea to review your loan documents and stay up to date on current laws. Consider talking to a lawyer if a dispute arises over impound account requirements, if your lender violates state interest laws, refuses a valid cancellation request, or if you feel your consumer rights are being infringed.