Home > 2011 > Personal Finance

Why Do I Have to Impound My Taxes?

Advertiser Disclosure Comments 2 Comments

Lenders are increasingly asking that borrowers pay one-twelfth of their property taxes each month as part of an increased mortgage payment. This really bothers borrowers in California where it is illegal to require impounding on loans less than 90 percent loan-to-value. They have never had to do it before and now feel abused that someone is asking them to do so. Not sure what an impound account is? Keep reading.

The latest wrinkle is that lenders are charging extra if they do not wish their taxes impounded. They typical charge a one-time charge of  ¼ point, $1,000 on a $400,000 loan. Another, more positive way of looking at this is that if rates are normal, agreeing to a loan without an impound account, you get an incentive payment of $1,000 for being willing to do so.

This fascination with property taxes seems unusual but there is a good reason for it and thus it’s worthy of further study.

[Resource: A Step-by-Step Guide to Buying a Home in Any Market]

Lenders have the right to foreclose on a property if the loan goes into default, typically because of delinquencies in monthly payments. But not paying property taxes is also an “event of default.” If property taxes become delinquent, the lender steps in, brings them current, and then files a notice of default to begin foreclosure proceedings. As an owner, you don’t want to have them do that. It is not in their best interest to let this happen either.

Now, I’m sure that you, noble reader, always pay your property taxes on time, but a fairly serious number of people do not. How many? Historically it runs about ten percent and it may be worse these days.

Remember also that most lenders who accept payments are really “servicers” who collect payments for someone else. Their servicing contracts provide what they are supposed to do. Big lenders may service 10,000,000 loans. If ten percent don’t pay,
that’s 1,000,000 letters they have to write and follow-up on. And they have to do it again in another six months.

[Related: Do-it-Yourself Real Estate Services]

You would have to have a pretty big department to handle this problem. I don’t know who many people it takes to keep after 1,000,000 borrowers, but I’m assuming it’s a lot. And remember these days, these same servicers have their hands full with foreclosures and seriously delinquent borrowers. They do not want one more set of problems. Perhaps more critical to them is that they do not get paid extra for chasing borrowers who are delinquent on their tax payments unless the home goes into foreclosure.

For that reason many lenders will require, in states that do not prevent them for doing so, that they establish an escrow account for borrowers. In some states it is known as an impound account. They calculate one-twelfth of the annual tax payment and add that amount to your principal and interest payment. When the taxes are due, the lender then makes the payment out of the accumulated reserve account. Ultimately this is cheaper for them than chasing the deadbeats who don’t pay on time.

In the old days when you could earn interest on your money in the bank, many people resisted because it would cost them some interest. These days, you earn less than one percent interest, so it’s not like it’s a profitable deal. At one percent, you earn a mere $10 per thousand dollars in the bank– and you have to pay income taxes on that income.

[Product Spotlight: Free Trial Credit Scores]

Using the figures in my example, I cannot fathom why someone would pass up $1,000 in savings so he could earn that interest.

Finally, having dealt with many borrowers in this situation, I would have to say that most peoples’ objection to the impound account is that they just don’t like someone telling them what to do. If that’s you, try to get over it and figure out some fun thing to do with that $1,000.

Image by Diana Parkhouse, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Helen Lopez

    I have an impound account with Bank of America but they did not pay my property taxes in December. I found out in January by checking with the County. I had to write a check for late fees when this occurred. I contacted Bank of America and they wrote me a check for reimbursement out of my escrow account and marked it as miscellaneous. The Bank took out the deliquent fees out of my escrow account. It was an extra $115.00 so now my monthly payment has changed by rising 8.98. I paid the deliquent fee for the Banks mistake. Can I force them to pay me back for their error?

  • Pingback: Credit.com’s Big Roundup of Tax-Time Tips | Credit.com News + Advice()

  • Margaret Jones

    We live in California, but own a property in Arizona which we rent out. Recently we refinanced to get a better interest rate on the loan.
    We have always paid our property taxes and insurance oursevles and ahead of time, but have not been told that we cannot do this as it is a rental property in another state.
    Can they do that especially as we have never defaulted on any payments.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team