Separate taxes from mortgage payment?

Q: We want to separate our taxes and insurance from our mortgage payment, but our mortgage servicer says no. It did not collect enough to pay our taxes, and now there is a shortage. We want to prevent this in the future. Is the servicing company right? — Tania

A: Your mortgage lender requires you to escrow your property taxes and homeowner insurance payments so that it can make the annual payments for you. This is referred to as an “impound” account. With this feature, your lender will collect 1⁄12 of the annual payment each month along with your payment of principal and interest.

There is not always the right amount of money in the account. If the balance goes to low, your lender will ask for more. If the balance gets too high, you will get a refund. Since taxes and insurance rarely decrease, your lender is allowed hold up to an extra two months’ worth as a cushion against shortfalls.

This is your money, but it is being controlled by your lender to make sure that these large annual payments get made. Your lender can do this because you agreed to it as a condition of getting the loan. Government-backed loans will require the creation of an impound account, as will most conventional loans, where the loan balance is more than 80 percent of the value of the home.

Most of the time, impound accounts are a good idea for the borrower because they avoid the necessity of making large outlays. Letting your insurance lapse or not paying your property taxes will put your mortgage in default, possibly leading to foreclosure. Impounds can be thought of as forced savings accounts, helping both the lender and homeowner avoid these problems.

Depending on the type of loan you have, how much you owe, and the value of your house, you may be able to opt out by asking your lender. If you do opt out, I strongly suggest that you set up a savings plan and stick to it.

Gary Singer