The monthly payment you make on your home consists not only of your mortgage payment, but “impounds” as well. “Impounds” refer to the pro-rated property taxes and hazard insurance payments you are required to make. You may have heard the industry term “PITI”. This stands for Principal, Interest, Taxes, and Insurance. When an underwriter evaluates whether you can afford your new loan, they account for the fact that your monthly payment consists of PITI, and not just the mortgage payment. So let’s first discuss the property tax component of your monthly payment.
Your property taxes are levied by the county in which the property resides. These taxes are required to be paid twice a year (consult your Keystone Funding representative for the due dates on these property taxes, which vary by state). The annual tax payment is roughly equal to 1.25% of the assessed value of the property. Note we did not say “appraised value”. If you are purchasing a property, the assessed value will equal the appraised value. But if you are refinancing, the assessed value is the value determined by the county assessor’s office. For example, if you are refinancing your home, and the county assessor has determined the property value to be $400,000, but the appraiser the bank sends to your home says the value is $440,000, your property taxes will be based on $400,000. The appraised value is not reported to the county. Per these property taxes, you may pay them on your own twice per year, or you may have your mortgage lender do it for you. When your mortgage lender pays your property taxes, you will be required to make monthly payments to your lender so that they will have the money to pay your taxes. For example, if the assessed value on your home is $400,000, and our property tax rate is 1.25%, your annual tax liability will be $5,000. This equates to $417 per month ($5,000 divided by 12). Thus, each month your lender will require you to pay $417 to your tax impound account, and before the due dates on the property taxes, your lender make the payments for you.
Additionally, your monthly housing payment may consist of insurance impounds. Insurance impounds function the same way as property tax impounds. Your insurance provider (and every lender requires the property be insured for catastrophic damage, ie fire) requires an annual or bi-annual payment on the insurance premium. You may pay this on your own, or have your lender pay for you. If your lender pays for you, you will be required to make monthly payments towards the insurance impound account. A ballpark number to use for calculating your insurance payment is 0.30% of the total loan amount (not the property value). For example, if you are purchasing a property for which you require a $350,00 loan, your annual insurance payment will be in the ballpark of $1,050, or $87.50 per month if you setup an impound account.
Talk to your Keystone Funding representative about whether setting up an impound account is right for you. In some states, such as California, there is no penalty for paying these taxes and insurance on your own. In other states, you will be required to pay approximately 0.25% of the loan amount at closing, in addition to standard closing costs, if you choose to waive impounds.