How Do Impounds Impact Your Loan When Refinancing?

Q: How do Impounds (an Escrow Account) for Taxes and Insurance impact your loan when refinancing?
There are many borrowers who LOVE an Impound Account! There are just as many borrowers who DISLIKE an Impound Account! Some don’t want to deal with taxes or insurance when they come due, so an impound/escrow account is peace of mind. Others want complete control over their finances, so an impound account is out of the question. EITHER WAY is fine, BUT…there are potential complications that come into play with having an impound account. For example…
1) With an impound account, the lender only does an audit once a year…and if the amount of taxes or insurance increase during that year, you are not paying enough to your lender to cover the amount required. Therefore, you end up with a shortage in your account. Then your payment goes up for the next year!
2) For 6 months out of the year, all loan officers pull their hair out when clients who have an impound account want to refinance. And clients aren’t that thrilled either! And that is because, depending on the month, the new lender must collect taxes and insurance for your NEW impound account while you have a lots of money sitting in your current impound account that you won’t be able to get back until AFTER the refinance!
To explain, what if you are refinancing and the plan is to close in February. Well, the second half property taxes are due February 1st and delinquent April 10th, so your current lender can pay those taxes any time between those dates. But they generally will pay them closer to the delinquent date. However, the new lender needs to make sure they are paid before you close on your refi because they are DUE Feb. 1 and property taxes take priority over the lender lien. Therefore, one of two things will happen: your new lender will have to collect from you 6 months to pay for the 2nd half taxes AND collect 2 more months to put into your new impound account. And what happens to all that money sitting in your current impound account that you have been paying into every month? Well, you will have to wait to get that money back AFTER you close the loan! The second thing that can happen is this. Your new lender will ask you to find out when your current lender will be paying the 2nd half taxes. So you call up and find out that they will pay them March 15. But you are supposed to close on your new loan in February and they are due Feb. 1! Sure, you can ask your current lender to pay them early and they can say no. Or…you are left again with having to front all that money to the new lender and then wait until after you close to get the money in your current account back. Well, what if the new lender paid the taxes when you closed the deal and then you found out your current lender paid them also even though they said they would pay them later? Now you have to deal with the County Tax Collector and I will tell you it could take months/a year to get that straightened out!
For 6 months out to the year, you can be put in a position, if you impound, to have to come up with money first and then wait to get your current impound money back AFTER. And what if you don’t have the money to front? That’s a great question! You may have to decide to NOT impound at that time and then call the new lender after you close to set up an impound account! What a mess, right?
Just be aware that if you are refinancing during September, October, November, December, January, and February, you will be subject to these issues if you impound. And remember, it is NOT the lender’s fault when they ask you to come in with lots of money just for the impounds. What is the solution? Consider not impounding and pay those monies yourself when they become due! When you go to refi, it will be a lot easier…on everyone!
For questions regarding this and any other lending scenario, feel free to call Curt Kravitz at Bay Equity Home Loans. 661-705-2500. He has been helping educate borrowers for the past 35 years!