Impound Funds

Description:

Often, residential real estate lenders require borrowers to deposit a reserve of funds in an escrow account to pay for property taxes and insurance. Depending on the borrower's creditworthiness, the lender may make this a requirement of the loan, or make it optional for the borrower. This is referred to as an impound account or impound funds.

The reason for this is to ensure that the property taxes and insurance are paid, even if the borrower runs into financial difficulty. Some borrowers choose to set up an impound account for convenience, even if it is optional for them.

Lenders collect the impound funds the same way they collect principal and interest payments, and it is commonly called PITI: principal, interest, taxes, insurance. The funds are held in an escrow account, which is a neutral third party that holds the funds. In this sense, they are not really paid to the lender, they are set aside as reserves.