Mark Wills explains escrow and impound accounts for notary loan signing agents. Learn how lenders bundle property taxes and homeowners insurance into your monthly PITI payment, and why they hold money in these accounts to cover those bills.
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Hi, I'm Mark. I teach the loan signing system. I'm frequently asked by new notary loan signing agents what is the difference between an escrow account and an impound account? And they also ask me, what does PITI stand for? And the biggest question I get is how do lenders actually calculate what to collect on a monthly basis for this impound account? When you're doing a loan signing, the borrower may have specific questions about their impound account. So you need to understand how they work. In this video, you'll learn the basics of what an impound account or an escrow account is. First and foremost, an impound account and an escrow account are the exact same same thing. One can say that their taxes and insurance are impounded, or they can say they have an escrow account for their taxes and insurance. So what is an escrow account or an impound account? But before I can answer that, it's important to understand how property taxes and homeowners insurance is billed. Let's start with taxes. Every homeowner in America has to pay property taxes so the municipality can pay for local roads, schools, fire departments, etc. Property taxes are due twice a year and the homeowner is required to pay property taxes based off a percentage of the value of their house. So let's just say the property taxes are 1.2% of the home value and the home value is $100,000. There'd be a twelve hundred dollar tax bill due every single year. The important thing to note is that their tax bill is typically due twice a year. So they would have two payments of $600 each year. And there are some people that will save $100 per month on their own and pay their tax bill twice a year when the bill comes in the mail. Same with homeowners insurance or also known as fire or hazard insurance. The lender wants to make sure that their home they are lending against is insured in case of fire or any other type of damage to their investment. No different than why you have car insurance. Except homeowner insurance premiums are due once a year. And just like the tax bill, some people will save for their insurance bill and pay the annual premium when it comes in the mail once a year. Pretty simple, right? However, some people don't like to put money aside on their own for bills that are coming due. Or frankly, some people are just not good at saving money. And that is how an impound account or escrow account is came to be. The bank created a simple way for the borrower to give them money that is due for their taxes and their insurance. And when the tax bill or insurance bill is due, the bank will actually pay the tax bill or insurance bill on the behalf of the borrower. So the easiest way to understand an escrow account is that it's simply a savings account for taxes and insurance. That's it. So how does the bank determine how much is set aside each month and in this escrow account? And how does that affect a borrower's monthly payment? It's easy. Essentially, they take the annual estimated tax bill and the annual insurance premium and divide it by the 12 months there is in a year. Then they add that amount to the principal and interest payment, and that is the total amount the borrower owes to the bank every single month. The monthly payment will include principal. It will include interest, debt, taxes and insurance, or also known as PITI. So in our previous example, property taxes are $1,200 a year. Divided by 12, it's $100 a month. Then let's say the homeowner's insurance is $600 a year. Divide that by 12 and that's $50 a month. So the bank would add $150 to the principal and interest for a total monthly payment of principal, interest, taxes and insurance. During a loan signing, the note will include the principal and interest part of the payment, but will not include taxes and insurance. However, the payment letter will show the borrower their total monthly payment, which always includes principal, interest, taxes and insurance. And now you know what PITI stands for. This is why in my loan signing system, I recommend pulling out the note and payment letter first and put that in front of the loan docs and you're signing, since these are the two most important things the borrowers want to confirm. And now that you know what an escrow account or impound account is and how the lender determines how much to collect every single month, you should be confident the next time there's a question that arises about the impound or escrow account. Subscribe to my YouTube channel and blog at loansigningsystem.com to get weekly tips and strategies so you make even more money as a notary public loan signing agent. And when you're ready to become a top loan signing agent, get my course the Loan Signing System to learn how to do a perfect loan signing and get even more loan signings. I'm Mark and I look forward to helping you become a top loan signing agent.
