Impounds: Savvy Jumbo Loan Trick

Many aspects of a jumbo loan are confusing to borrowers, and impound (escrow) accounts rank high on the list. It’s the responsibility of the banker to educate borrowers on impounds, so the borrower can make the right decision based on his individual needs. But, the real trick is knowing that in general the rate discount for having impounds is about 0.125 up to 0.25% annually. As jumbo loans with impounds have the lowest rate of default so the saving is passed on. Borrrowers who lack the discipline to save money and end up scrambling to write those big checks for property taxes and hazard insurance premiums may want to consider an impound account. The chart below shows some of the pros and cons of having an impound account. Borrowers who are more disciplined and can better manage money on their own may choose to not open an impound account.

PROS CONS Borrower convenience Less control Ensures payment Homeowner is still responsible Protects the home Funds tied up Earns interest (see below) Earns little or no interest

Lender-Required Impounds Lenders and investors are very risk-averse in today’s mortgage environment, and may require an impound account. Impounds are mandatory for all FHA loans, regardless of the loan-to-value (LTV). High LTV and high-balance loans are riskier for all lenders, and individual lenders may impose their own impound requirements. Even if a lender does not require impounds, there may be a fee to waive them. Unless impounds are required by a lender, the borrower should be educated and have the right to choose.

Many States Require Interest on Impounds to be Paid

		STATE	CURRENT INTEREST
		California	2% annually
		Connecticut	1.5% annually
		Maine	0.205% quarterly
		Massachusetts	2% annually
		Minnesota	3% annually
		New York	2% quarterly
		Rhode Island	0.225% annually
		Utah	0.594% annually
		Vermont	0.25% quarterly
		Wisconsin	0.46% annually