What are impound accounts used for?

Impound accounts, commonly also referred to as escrow accounts, are specifically designed to accumulate funds for property-related expenses, primarily property taxes and homeowner's insurance. When a borrower takes out a mortgage, lenders often require the borrower to contribute a portion of their monthly mortgage payments into an impound account. These contributions are set aside until the payments for property taxes and insurance are due, at which point the lender will use the accumulated funds in the account to pay these expenses on behalf of the borrower. This ensures that these critical obligations are met in a timely manner, reducing the risk of penalties or lapses in insurance coverage.

The presence of impound accounts also aids borrowers in budgeting for these larger, irregular expenses by dividing them into manageable monthly payments. Thus, when property taxes and insurance premiums come due, the homeowner does not face a sudden financial burden, as the funds have already been set aside in the impound account.