In California, you might be able to get rid of an impound account—known as a “mortgage escrow account” in other parts of the country—and pay your property taxes and homeowners' insurance bills on your own. But whether you may cancel the account depends on some factors.
Read on to learn more about impound accounts and find out under what circumstances you might be able to cancel this kind of account in California.
When you have an impound account as part of your mortgage, the servicer collects extra money from you each month, over and above the principal and interest you owe. The servicer puts the additional money in a special 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 happens to the money in an impound account? The servicer uses money from the impound account to pay property taxes and homeowners' insurance bills when they come due. Sometimes, the servicer also uses the funds to pay private mortgage insurance or homeowners’ association dues from an escrow account. These items are all known as “escrow items.”
How much extra money do you have to pay each month? Generally, you have to 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 as well, typically around two months’ worth of escrow payments. The servicer then uses this money—called a “cushion”—to pay for unexpected increases in the 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. (To learn more about how mortgage escrow accounts work, see Understanding Your Mortgage Escrow Account.)
Why do lenders require an impound account? Lenders use an impound account to address two main concerns: uninsured property damage and losing the property to property tax sale. Having an impound account ensures that money is available to cover these important costs. (To learn about property tax sales, see What Happens If You Don't Pay Property Taxes on Your Home?)
Under California law, the lender can require an impound account for a single-family, owner-occupied dwelling if:
If the loan doesn’t meet any of these seven conditions, the lender can’t require an impound account. However, 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.
So, if you have a government-backed loan, like a FHA or VA 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. Lenders have different rules for canceling an impound account, but 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. (Learn more general information about canceling an escrow account.)
To find out whether you can cancel your impound account, call your loan servicer. (If you need help figuring out which company services your loan, see How Do I Find Out Who Holds My Mortgage?)
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 the 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.
Also, keep in mind that if you don't have an impound account and you fail to pay the taxes or insurance premiums, the servicer might advance amounts pay for these items, and you'll then have to repay the servicer. If you don't reimburse the servicer, you might face a foreclosure.