Escrow Explained: How Impound Accounts Work

Here is the updated content with strategic internal links to your relevant guides on closing costs, mortgage calculators, and first-time buyer resources.

When buying a home, your monthly payment often covers more than just the loan itself. A significant portion of that payment likely goes into an impound account—commonly referred to as an escrow account.

Understanding how this account functions is essential for accurate budgeting, both for your monthly expenses and your “cash to close” on move-in day. For a detailed look at all out-of-pocket expenses, review our Complete Guide to Mortgage Closing Costs.

What is an Impound Account?

An impound account is a dedicated holding account managed by your mortgage lender. It acts like a forced savings account for two major homeownership expenses: property taxes and homeowners insurance.

Instead of being hit with massive, multi-thousand-dollar bills once or twice a year, your lender collects 1/12th of the estimated annual cost each month. When the bills come due, the lender pays them on your behalf using the accumulated funds. This ensures your conventional mortgage or FHA loan remains in good standing.

How the Escrow Process Works

1. The Monthly Split: Your total mortgage payment is typically divided into four parts, often called PITI: Principal, Interest, Taxes, and Insurance. You can see a full breakdown of these costs using our PITI Mortgage Calculator.
2. The Disbursement: When your county sends out tax bills or your insurance company renews your policy, the lender receives the invoice and pays it directly from the account.
3. The Annual Audit: Once a year, lenders perform an escrow analysis. They review the account to ensure they are collecting enough to cover the bills.
   • Shortage: If taxes or insurance rates went up, your monthly payment will likely increase to cover the gap.
   • Overage: If there is a surplus (usually over $50), the lender will often send you a refund check.

Pros and Cons of Escrowing

How Impound Accounts Impact Your Closing Costs

Many first-time homebuyers in Kansas City are surprised to find that their closing costs include several months of taxes and insurance upfront. This is because the lender needs to “seed” the account so it’s ready for the first bill.

• Prepaid Items: You will typically pay your entire first year of homeowners insurance upfront at closing.
• Initial Escrow Deposit: Depending on the time of year you close, the lender may require 2 to 6 months of property taxes to be deposited immediately.
• The Two-Month Cushion: Federal law allows lenders to maintain a “cushion” equal to two months of escrow payments to protect against unexpected tax or insurance hikes.

Real-World Example

Imagine your annual property taxes are $3,600 ($300/mo) and your insurance is $1,200 ($100/mo).

• Monthly Impact: Your mortgage payment will include an additional $400 for escrow.
• Closing Cost Impact: You might be required to pay $1,200 (1 year of insurance) plus an initial deposit of $800–$1,500 (a few months of taxes and the 2-month cushion).

Final Thoughts

An impound account is a tool designed to protect both you and the lender. By ensuring taxes and insurance are always current, it simplifies the responsibilities of homeownership. However, because tax rates and insurance premiums fluctuate, your mortgage payment may change slightly from year to year. For more answers to common questions, visit our Mortgage FAQ Guide.

Ready to see what your specific monthly payment might look like? At Metropolitan Mortgage, we provide transparent breakdowns so there are no surprises at the closing table. Contact us today at (913) 642-8300 or apply for a pre-approval online to review your home buying options.