Impound Account Cancellation Question

9 Replies

My lender would not let me cancel my impound account until my LTV is 80% or less. Their LTV is based on the appraisal from 1.5 years ago (much lower value) rather than current FMV and they wouldn't revalue the property based on market increase. I asked if I could take out RE tax from the impound and leave PMI in, the answer was still no.

Just wondering if that's the standard industry practice (not allowing the owner to start paying RE tax themselves) or if these are lender-specific policies?

Just found an answer to my question - strange though, because I'm pretty sure that I had the option of not having an impound at the time of refi. Also, wasn't required to have the home insurance go through the impound.

Required Mortgage Impounds - Since low down payment borrowers are considered to be a higher risk due to their lower personal stake in the property, lenders want some level of assurance that the state will not seize the property because of non-payment of property taxes, and that borrowers won't be without homeowners insurance in the event that the property is damaged. An impound account ensures that the only person who will become owner of the house in case of default will be the lender.

Lenders make money on escrow accounts.  They're only going to give them up if you pay in some form or another.

If your property's value has increased significantly a refi might let you get rid of PMI.

Jon Holdman, Flying Phoenix LLC

Originally posted by @Tatyana S. :

My lender would not let me cancel my impound account until my LTV is 80% or less. Their LTV is based on the appraisal from 1.5 years ago (much lower value) rather than current FMV and they wouldn't revalue the property based on market increase. I asked if I could take out RE tax from the impound and leave PMI in, the answer was still no.

Just wondering if that's the standard industry practice (not allowing the owner to start paying RE tax themselves) or if these are lender-specific policies?

 HI Tatyana,

Depending on what your current rate is you could refinance and structure the loan as a no cost deal so you seamlessly move down in rate and obtain better terms and remove your impounds simultaneously.

Hope that helps, let me know if you have any questions.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

Thank you for the feedback, @Jon Holdman and @Albert Bui . I have been and am currently looking at refinancing. The reason I didn't go through with a refi before was because I would be facing a rate hike, at least for a 30-year fixed. That cancelled out most of the saving from being PMI-free. The condo used to be a primary home and now it is a rental.

I am going to look at different refi options again and weigh the rate hike against not having the PMI and escrow.

Hi Tatyana,

It looks like we're in the same neighborhood almost. 

If you're property is now a rental and the value has gone up, definitely look at refinancing. Start thinking about cash flow opportunities. In this case, an ARM loan may allow for a lower interest rate which could be lower monthly payments and more money each month.

Good luck,

Jeff 

This is a bit of two separate issues that should not be merged.  Impounds and Mortgage Insurance.  

The impound demand is made within the loan documents.  As such it is not likely that impounds will be waived for the life of the loan as that would require a modification to the mortgage.  So the only way to remove an impound demand is to refinance or have a formal modification.  There is no obligation for a mortgagee to remove at any time demands for impounds for the life of the loan.  

That is separate from mortgage insurance.  When you closed on your loan you should have received a disclosure which detailed the mortgage insurance parameters.  This will include the date according the loan amortization table which the mortgage insurance will be terminated.  Everything is based on that amortization table at the time of origination.

The idea that PMI can be removed solely based on property appreciation is not entirely spot on. It use to be easier for borrowers to point out to the Mortgagee that the property value has exceed the threshold simply by appreciation. Some Mortgagees worked with the idea. Those days are dead and gone. Mortgagees are also much more experienced with claim processing on those policies and as such, they do sort of want to keep them around to protect against loss.

The termination parameters, as I mentioned, are based on balance level in accordance with the real property value at the time of origination.  The Mortgagee does not have an obligation to investigate or recognize appreciation.  As such, the parameters to the policy will illustrate a loan balance level and a date in the amortization table which upon the borrower paying on time as agreed to the amortization schedule the policy will terminate.  

Early termination of the policy is based on the loan balance not property value.  As such, a borrower would have to make additional principal payments in order to have the policy cancel prior to the termination date.  The public misnomer is that if the property value rises to 78% (80% is the initial termination level, 78% is the required termination level) then the policy can be canceled.  While a formal request to the Mortgagee must be responded to, the Mortgagee is not obligated, as I said, to investigate the value of the property nor recognize a value increase or decrease for that matter.  It doesn't hurt to ask (formally in writing).  Some Mortgagee 'might' cancel but those will be few and far between.

@Jeff Trevarthen - yes, we are close by! Thanks for the feedback. I'm looking at a 7/1 ARM. Like you said, lower interest rate, more cash flow and still gives me enough time to figure out the next move before any adjustments kick in.

@Dion DePaoli - thank you for your detailed and very educational reply! My recollection is that there was no demand for an impound at origination -- it was my choice to have it. When I asked the lender not to include home insurance in the impound, they didn't include it. I mistakenly thought that I can cancel the impound at any time. I also understand the parameters for PMI cancellation.

Time to refi and hopefully with a lender whose refi process doesn't take 3 different newbie loan processors and 6 months to close.

Tatyana,

I came across the post about impound account.  I am a mortgage banker in Burlingame, CA.  6 months to close a loan sounds very long.  If you have any questions about refinancing rental properties and/ or look for a right loan program, please feel free to ask.

*The loan to value ratio is typically lower for the rental properties than the primary residences.

Best,

Kyle Chuang