This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide.

You’re getting ready to take a huge step forward in your life to buy your first home and everything is going great until your lender brings up the impound account. Impound account? It sounds like a negative thing, but an impound account can be a very important and helpful tool used in the home buying process.

However, there are also a couple potentially serious drawbacks. If you’re thinking about purchasing your first home, you should familiarize with this type of account and determine if it’s something you’re willing to use.

Impound Account Definition

An impound account is also commonly referred to as an escrow account. It’s a separate savings account established by a mortgage lender in order to hold funds that will later be used to pay the property tax and insurance costs on a home. Those are the only two things the money can be used for–taxes and insurance. That means if you’re behind on a mortgage payment or bill, too bad; you have to find the funds you’re lacking elsewhere.

Since property tax and insurance payments can be pretty high and only need to be addressed a couple times a year, people find it’s easier to set the extra money aside at the time they purchase their home, rather than save up for the big expense every six months. Usually, lenders require that an impound account be set up anyway.

How Fees Are Paid From an Impound Account

Property taxes and insurance premiums are only paid a couple of times a year, so the mortgage lender will divide up the yearly cost into equal monthly payments and then deduct that amount from the impound account.

For example, if you must pay $1,200 a year in taxes and insurance, $100 will be deducted from the impound account per month and tacked on to your mortgage payment. In most cases, a lender will require you to deposit several month’s worth of payments into the account ahead of time so there is a decent balance built up.

For this reason, your overall monthly mortgage payment will increase due to the addition of impound account payments, though you really pay for the difference ahead of time.

Why Are Impound Accounts Used?

Lenders prefer that borrowers keep funds specifically allocated for taxes and fees in a separate account to prevent any lapse in payments. Falling behind on these payments could potentially result in a lowered property value.

Rather than count on a borrower to come up with these important payments every month, the impound account ensures they will be met without any problem, even if the borrower runs into financial troubles.

Dividing these costs over a longer period of time can also be of great benefit to the homeowner, too. Budgeting becomes much simpler and all of the costs associated with purchasing and owning a home seem a bit easier to manage.

Potential Problems

As mentioned, the money you put into an escrow account is then kept for the specific purpose of paying taxes and insurance. If you decide later on that you actually need the money you deposited for something else, well, you’re out of luck. Once the money goes in, it stays in until your lender needs it.

It’s also very important to be aware that many impound account balances fall short over time. Taxes tend to go up on a regular basis while insurance premiums generally rise over time as well, which means the amount you originally set aside for these costs may no longer be adequate down the road. Be sure your lender factors these possibilities into the calculation when determining how much you will need to deposit.

One Big Plus Side

Impound accounts can earn interest–pretty good interest, too, considering what traditional savings accounts are offering these days. However, there are a few catches. The rules vary state-by-state, but certain factors like when the loan originated and whether the account was voluntarily opened or required by the lender determine whether it’s eligible to earn interest.

Impound accounts may simplify budgeting and give the you peace of mind that at least one bill is paid up, but if you take issue with losing some control over the fate of your hard earned money, you might want to think twice about committing to loan terms that include one.

Sometimes an impound account requirement can be waived, but not always. Ask about the terms of your mortgage and how an impound, or escrow, account will factor in before you agree to a loan.

Renter's Win, Home Owners Lose by Tom Graneau

Five years ago at the peak of the housing market, my husband received a call out of the blue from a mortgage broker. He had automatically qualified for a home loan up to $290,000. However, living in Southern California, there weren’t any properties selling for this low of a value. He kindly turned down the offer and we continued our lives as renters.

At that time, houses in my area started at $435,000. For that price, we’d be buying a major fixer upper in a questionable neighborhood. Though friends were saying it was a good time to buy because loans were so attainable, I just couldn’t get the math to work out in our favor. I was under the impression that you shouldn’t buy a home for more than 3 times your income. Based on what homes were selling for, I couldn’t believe that the majority of people were making double six figures, or $200K annually. Needless to say, the income to house price ratio was thoroughly out of whack. People were still only making about $55,000 to $130,000 annually, yet purchasing homes averaging around $550,000.

Why were these people duped into home ownership? Given my own personal experience, people really believed their homes would never lose value. If they didn’t buy now, they’d never be able to afford a home based on the exponential increase in prices.

Renters Win, Home Owners Lose: Revealing the Biggest Scam in America by Tom Graneau was written in response to this most recent housing bubble. When I was asked to write a review on this book, the title alone intrigued me. As a renter who wants to own a home someday, I was curious about his research.

Summary

Renters Win, Home Owners Lose is a look at what fed into the most recent housing bubble and its decline: the media, real estate agents, mortgage brokers, greedy financial institutions. Too many people were “forced” into home ownership not really understanding the responsibilities associated with it. The idea of the “American Dream” is still ingrained in most American’s minds, leading them to do whatever is necessary to purchase property. A house or piece of property is looked at as an investment in one’s future. However, Mr. Graneau begs to differ.

Points of interest I agreed with

Mr. Graneau made a few strong points about how renters have more advantages and positive cash flow than most home owners.

1. They are not responsible for repairs. This can save renters a large amount of money in the long run. Home owners are responsible for minor and major repairs which can cost thousands of dollars a year.
2. They are not responsible for Home Owner Association Fees. Renters are not responsible for these fees. However, I would assume that a home owner who is renting a property has already factored in the HOA fees into the monthly rental amount. The only time this would be in the renters favor would be if the HOA fees increased, yet their rent didn’t increase to reflect the difference.
3. They save money on property taxes. Again, as a renter I assume my landlord has already factored in property taxes into my monthly rent. Since I live in a state that hasn’t raised property taxes in 30 years, my landlord comes out ahead. However, landlords living in states with high property taxes probably have trouble adjusting rents to keep up with the tax increase.

One of Graneau’s major points was that home owners tend to stretch themselves thin to make a monthly mortgage payment. If they had remained renters and had invested the difference, they would come out ahead in the long run. The problem usually lies in the fact that renters don’t invest the difference, so the majority don’t come out ahead.

Another advantage I would have added to his list is the ability to relocate. Many home owners are literally stuck; they can’t sell their homes because the market is depressed, and they can’t rent them out to cover their mortgage. All a renter needs to do is give their landlord a 30-day notice. Of course, if they are in a lease, they might have to offer them a settlement amount for the remaining portion.

Overall his message is to be realistic when purchasing a home. It’s not an investment, per se, it’s a place you will live. The idea of flipping it with 5-years is unrealistic given historical data on housing prices.

Points I didn’t necessarily agree with

Since the book was in direct response to the current housing market, a bear market that we haven’t seen in decades, much of his advice is biased. For instance, if a person sticks to the 2.5 times to 3 times their income to house price ratio, it’s not uncommon to obtain a mortgage for less than one would pay for the same property, but in rent. A few advantages (in my opinion) to owning a home, or complete washes to either are as follows:

1. Monthly mortgage may be lower than monthly rent. I live in an area where monthly rent averages about $2,000. Currently, “starter” homes are selling for about $300,000. At today’s low interest rate, my mortgage would be less than what I’m currently paying in rent. (Of course I’d have to factor in maintenance costs).
2. Insurance is a wash. One of Graneau’s renter’s advantages was that home owners spend more money on insurance. However, as a renter, I’m paying the same amount for renter’s insurance that my landlord pays on home owner’s insurance. Of course, I’m sure it has something to do with living in California.
3. Responsible home owners can eventually make some of their money back, or at least break even. As a renter, I will never, ever get any of my rental payments back. Not now, not ever. Yes, home owners pay a large portion in interest. But, if they sit on their homes for 10+ years (maybe more, maybe less depending on the market), they will get some of that money back that they paid in. Renters will never benefit from the potential to break even.
4. Home owners end up “homeless” when things go awry. Don’t pay your mortgage, eventually the bank will take your home. However, it takes many, many months for the bank to actually kick a home owner out on their ear. This hopefully gives the home owner (soon to be renter again) time to save up a little money and make a solid financial plan. Their credit is now wrecked. However, if a renter doesn’t pay rent by day 5 or 10, guess what? They only get about 30-45 days to get their finances in order and then hit the street. Their credit is now in the dumpster as well.

Over all, Graneau’s ideas left me thinking that renting isn’t such a bad option;  a point he was trying to make. It also made me think about the reasons I want to own a home. If anything, when and if I become a home owner, I will definitely be making the largest financial decision of my life.

Based on my pros and cons, what questions might you have for the author?  Would you be interested in reading his book?

Rent vs. Buy

I’m saving my pennies for a down payment on a house. Perhaps I’ll figure out where I want to purchase a house (one problem we are having with not being ready) and will have my down payment saved over the next few years as a renter. I have used a savings plan calculator to help get my act together.

Someday I hope to be a home owner, yet that someday may be farther away than I had originally planned. Until then, though, is renting a financially sound option? Am I really throwing my money away? I have to live somewhere and few places are truly rent-free. Shelter is a basic necessity, obviously, and my options range from unusual to traditional. If my husband were more open-minded, some of the more unusual ideas I listed below could work:

• Build a cob house.
• Set up temporary living quarters in a Tuff Shed.
• Camp during the summer.
• Live in an RV.
• Convert a shipping container into a shelter.
• Go native – build temporary housing out of straw or mud and learn to live off the land.

These choices are unusual and all would require paying for storage to contain all of our modern possessions. However, the cost of rent would be nil and would off-set the monthly storage rental fee. Until my husband begins to think abstractly (and I learn to hunt and gather), these ideas are out of the question.

So that brings me to the more traditional rental options; renting a house or an apartment. In Southern California, rent is almost as expensive here as it is in New York City or San Francisco. I think we rank 3rd as one of the most expensive cities to live in. A few years ago, when we rented the house we currently live in, $1,800 a month seemed like a deal considering homes in the surrounding areas were selling for over $500,000. Though home prices have sank by up to 35%, rent has remained the same.

Since we aren’t as close to purchasing our own house as we would like to be, my husband and I are now talking about making a lateral move: move into another, nicer rental house for about the same price. I’m tired of the exorbitant electric bills in the summer and winter due to drafty windows, the cockroaches crawling out from under our cabinets, and the crummy plumbing. However, this got me wondering if continuing to rent was a sound financial decision. How many millionaires rent their homes? How many financially sound individuals choose to rent as opposed to buying property? What would it mean to us financially if we continued to rent for another 3-6 years?

After a little research on the subject (there is a lot of debate on this issue with the majority leaning towards buying as opposed to renting) and some calculations using both The New York Times calculator and Michael Bluejay’s calculator, buying is a more financially viable option after year 5 or 19 depending on which calculation I use. As an example, I factored in what a modest home in a good neighborhood is averaging in my neck of the woods, $350,000 with only 5% down, compared to monthly rent payment of $1,800.

• The New York Times calculator: I like that I can adjust the annual appreciation on a property and it determines if renting is more financially sound after 6 years versus 19. However, their complete analysis is a little light. The rent costs also seem a bit simplified. They approximate renter’s insurance costing $331 for 6 years and I pay more than that in one year alone!
• Michael Bluejay’s calculator: His calculator has a better explanation of why it would be better to rent up to year 5. And that is only if the amount saved is religiously invested! His calculator also breaks down renting versus buying year by year.

On a side note, using Michael Bluejay’s calculator showed that when houses in my area were selling for no less than $500,000, renting was a much better option. Buying didn’t become financially viable until year 30! I feel very sorry for those people who are saddled with a mortgage of over $500,000.  At least I knew at that time that buying was completely out of the question and renting was a better option.

Perhaps I’ll figure out where I want to purchase a house (one problem we are having with not being ready) and will have my down payment saved over the next few years as a renter.

Do you rent or own? Have you recently thought about moving, but can’t due to owning a home? Are you saving for a down payment and hope to purchase soon?

Alexander, Who Used to be Rich Last Sunday

For those of you who know this story, you’ll know exactly what I’m referring to. For those of you who don’t, enjoy my version….This story is based on the story written by Judith Viorst titled Alexander, Who Used to be Rich Last Sunday.

It’s not fair that Sergey Brin is 32 and has eleven million dollars, four quarters, and three dimes in his bank account. It’s not fair that Reed Hastings has eight million dollars, four dollars, seven dimes, and eighteen pennies in his bank account. It’s not fair that all I have is…..fluff in my pockets. And that’s all I usually have is …… fluff in my pockets.

Last Sunday was pay day and I had a cool $800 left over after paying all the bills. I was rich. I decided I’m absolutely, positively saving my money for a down payment on a house. However, I decided to go window shopping at the mall. The cute espidrills and black mary jane loafers were calling my name. Since it was a buy-one-get-one day I thought I could afford to part with my money because I was saving money in the end. Good-bye $42.50.

The remaining $752.50 was definitely going in my savings account. But then I got hungry. I headed out to Chili’s to treat myself to an appetizer and a meal. Happy hour prices seem so affordable! The waitress was awfully kind and deserved a decent tip. Good-bye $25.00.

I’m sure by now Reed Hastings would tell me I won’t be able to afford a house until I’m 99. If I still lived with my parents, I bet I’d have to pay them for saying things no young lady is ever able to say. Thankfully I can keep those three dollars since I don’t live at home and personally don’t know Reed Hastings.

My $732.50 is certainly, most positively going into the savings account! Until I looked in my refrigerator and realized I was out of a few things. A quick trip to the grocery store and $65.75 later I now have a partially stocked fridge. As I was scanning my checkbook register later that day, I realized I could make another payment to my crummy line of credit to get that baby out of the way. Good-bye $200.

Four-hundred, sixty-six dollars and seventy-five cents is absolutely, positively going into my savings account. Crap! I washed my favorite capri’s that had a five dollar bill in the pocket. Good-bye five dollars. Good-bye flashlight.

If Sergey Brin were here to comment on my despicable progress I’m sure he’d say I won’t be able to buy a house until I’m 199. My parents would say there are just some things well-respected girls never kick, no matter how ratty or mean someone’s comments are. I’d owe them another dollar. Thankfully, I moved out of my parents’ house years ago.

I used to be rich last Sunday. Now all I have left is $461.75 and fluff in my pockets. After this long, holiday weekend I’m sure I’ll be waiting for payday to come around quite soon. Then I’ll definitely, positively put my money in my savings account.

Between my bike challenge for April and May and my debt repayment strategy plan, I’ve been keeping myself in check  with accomplishing my goals through baby steps. My bike challenge is much more rewarding; at the end of the week I can successfully say that I’ve accomplished my 24 miles for the week, if not more. It’s great exercise, so I don’t feel guilty if I scarf down a bowl of mint chocolate chip ice cream, and I’m saving wear and tear on my car and gas. Basically I’m saving money by committing to this challenge.

My debt repayment plan is on track as well, I paid $400 in April towards my crummy line of credit (my original goal was to pay $525, so I’m a little short). In contrast to my bike challenge, it’s not nearly as much fun! As much as I like seeing that total debt shrink, I also notice my bank account going in the same direction. Yet, I must keep persevering so that I can pay it off, then save that monthly payment for my down payment. At that point, I will also be in a good position to open an IRA and begin seriously contributing.

Summary of my goals and challenges for April (to keep me honest!):

• Bike Challenge: 60 miles in 16 days. That’s 12 miles more than what I had committed to. Whoo hoo!
• Debt Repayment Plan: reduced line of credit to $7,930. I would have liked to have paid off another $125 so I’m a little behind on this goal.

Crummy Loan Count Down

April / May Bike Challenge

Late summer goals that I will be pursuing by August:

• Open IRA (for a work at home mom and dads spousal IRA)
• Increase my savings account by a significant amount (I really can’t compute an actual number yet since I’m moving funds around and my income fluctuates greatly!)

I will continue end of the month status reports to help me stick to my goals. Hopefully, my current goals will help me meet my late summer goals!

What goals have you made this year? Are you meeting them? What about the goals you are behind on, do you feel guilty?