Property Tax Impound Account: How It Works With Your Mortgage
TL;DR
A property tax impound account (also called an escrow account) is a savings account your mortgage lender manages on your behalf. Each month, 1/12 of your annual property tax is added to your mortgage payment. When taxes are due, the lender pays them from this account. Lenders require impound accounts to protect their investment. If your taxes increase, your monthly payment goes up. If the account is short, you will get a bill for the difference. If there is a surplus, you get a refund.
What Is an Impound Account?
An impound account is a holding account managed by your mortgage servicer. Every month, you pay your principal, interest, and an additional amount that goes into this account. The lender uses the money in the impound account to pay your property taxes and homeowners insurance when they come due.
The terms "impound account" and "escrow account" mean the same thing. "Impound" is more common in Western states. "Escrow" is used everywhere else. Your lender may use either term.
How the Monthly Payment Is Calculated
Your lender estimates your total annual property tax bill and divides it by 12. That monthly amount is added to your mortgage payment.
| Component | Annual Amount | Monthly Amount |
|---|---|---|
| Principal + Interest | Varies | $1,800 |
| Property Tax | $6,000 | $500 |
| Homeowners Insurance | $1,800 | $150 |
| Total Monthly Payment | $2,450 |
The lender also maintains a cushion, typically two months' worth of taxes. Federal law (RESPA) limits this cushion to no more than two months of escrow payments. So your impound account will always have a small buffer in it.
When Is an Impound Account Required?
Most lenders require impound accounts in these situations:
- FHA loans: Always required
- VA loans: Usually required (can be waived in some cases)
- USDA loans: Always required
- Conventional loans with less than 20% down: Usually required
- Conventional loans with 20%+ down: Often optional, though some lenders still require it
If your lender does not require an impound account, you can choose to set one up voluntarily. Some homeowners prefer the convenience of having taxes paid automatically.
The Annual Escrow Analysis
Once a year, your mortgage servicer reviews your impound account. They look at the actual taxes and insurance paid over the past year and project what those costs will be next year. Three things can happen:
Shortage
If your property taxes went up and the account does not have enough to cover the next year's payments, you have a shortage. The lender will give you two options: pay the shortage as a lump sum or spread it over the next 12 months by increasing your monthly payment.
Example: Your taxes increased by $600/year. Your monthly escrow payment goes up by $50, plus a shortage adjustment if the account is already behind.
Surplus
If your taxes went down or the lender over-collected, you have a surplus. Under RESPA rules, if the surplus exceeds $50, the lender must refund it to you within 30 days. Surpluses happen when you successfully appeal your property tax assessment or when a new exemption reduces your bill.
Deficiency
A deficiency is worse than a shortage. It means your account actually went negative at some point. The lender had to cover a payment with their own money. They will require you to repay the deficiency and may spread it over 12 months.
Why Your Mortgage Payment Changes
If you have a fixed-rate mortgage, your principal and interest payment never changes. But your total monthly payment can still go up or down because of the impound account. When property taxes increase, your impound payment increases, and your total monthly bill goes up.
This is one of the most common reasons homeowners see their mortgage payment increase even with a fixed-rate loan. The mortgage itself did not change. The taxes did.
Can You Cancel Your Impound Account?
Possibly, depending on your loan type and lender:
- FHA and USDA loans: You cannot cancel the impound account
- VA loans: Cancellation may be possible with lender approval
- Conventional loans: Most lenders allow cancellation once you reach 20% equity. Some charge a small fee (0.25% of the loan balance) for this
If you cancel the impound account, you become responsible for paying property taxes directly to the county. Miss a payment and the consequences fall entirely on you, including penalties and interest.
How to Lower Your Impound Payment
The impound account payment is based on your property tax bill. The only way to lower it is to lower your taxes. You can do this by:
- Applying for exemptions you are not currently receiving (homestead, senior, veteran, disability)
- Appealing your assessed value if your property is over-assessed
- Correcting errors in the assessor's property records
A successful property tax appeal that reduces your assessed value flows through to your impound account at the next annual analysis. Your escrow payment drops, and your total monthly mortgage payment drops with it.
Think your property taxes might be too high? Use our free assessment analyzer to check your assessed value against comparable properties. If you are over-assessed, an appeal could reduce your monthly mortgage payment by lowering the tax portion of your escrow.
Frequently Asked Questions
What should I know about property tax impound account: how it works with your mortgage?
A property tax impound account (also called an escrow account) is a savings account your mortgage lender manages on your behalf. Each month, 1/12 of your annual property tax is added to your mortgage payment. When taxes are due, the lender pays them from this account.
What Is an Impound Account??
An impound account is a holding account managed by your mortgage servicer. Every month, you pay your principal, interest, and an additional amount that goes into this account. The lender uses the money in the impound account to pay your property taxes and homeowners insurance when they come due.
How the Monthly Payment Is Calculated?
Your lender estimates your total annual property tax bill and divides it by 12. That monthly amount is added to your mortgage payment.
When Is an Impound Account Required??
Most lenders require impound accounts in these situations:
What should I know about the annual escrow analysis?
Once a year, your mortgage servicer reviews your impound account. They look at the actual taxes and insurance paid over the past year and project what those costs will be next year. Three things can happen:
Why Your Mortgage Payment Changes?
If you have a fixed-rate mortgage, your principal and interest payment never changes. But your total monthly payment can still go up or down because of the impound account. When property taxes increase, your impound payment increases, and your total monthly bill goes up.
Can You Cancel Your Impound Account??
Possibly, depending on your loan type and lender: