What is the purpose of an impound account in a real estate transaction?

An impound account is specifically designed to hold funds for taxes and insurance payments related to the property. When a borrower takes out a mortgage, lenders often require the borrower to make monthly payments for property taxes and homeowners insurance, which are then held in this account. This arrangement ensures that these important payments are made on time, reducing the risk of unpaid taxes or lapsed insurance coverage, thus protecting both the lender's and the borrower's interests.

The proper management of these funds helps facilitate a smooth real estate transaction by taking one more item off the homeowner's to-do list, providing peace of mind. This is a common practice in real estate financing, ensuring that these recurring costs are anticipated and collected regularly as part of the overall mortgage payment.