Cancelling Impound Accounts
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 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." Lenders use an impound account to address two main concerns: uninsured property damage and losing the property to property tax sale. 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. These items are all known as “escrow items.” Having an impound account ensures that money is available to cover these important costs.
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 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.
In California, you might be able to get rid of an impound account and pay the bills for escrow items on your own. But whether you may cancel the account depends on some factors.
When California Requires an Impound Account
Under California law, the lender can require an impound account for a single-family, owner-occupied dwelling if:
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
there are two or more loans secured by the property, 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).
If the loan doesn't meet any of these seven 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.
Canceling an Impound Account
So, 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. 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.
To find out whether you can cancel your impound account, call your loan servicer.
What to Think About
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 to 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