How Does Homeowners Insurance Work During Escrow?

If you are looking for a home and will need a mortgage to purchase it, you might come across the term “escrow account.” Or you may currently have a mortgage and are already making escrow payments. Either way, it is a good idea to understand how your homeowners insurance works during escrow. 

Understanding these accounts will help you with your financial planning and budgeting. At the very least, it will ease your mind knowing what happens to the money you pay into this account each month:

What does it mean to “escrow” insurance?

Mortgage lenders set up escrow accounts to ensure that their borrowers are paying real estate taxes and homeowners insurance. The lenders are protecting their investment by paying the borrower’s insurance premiums and taxes from these accounts when they are due.

Each month, the borrower makes a payment that includes:

  •     Mortgage principal
  •     Mortgage interest
  •     Homeowners insurance
  •     Real estate taxes
  •     Private mortgage insurance (PMI), if required

 

At the beginning of the year, the lender calculates the amount due to the escrow account each month, and that figure is established by forecasting the insurance premium and taxes. When payments are due, the lender withdraws from the escrow account and pays them on behalf of the borrower. Most, but not all, borrowers enjoy  the worry-free convenience of paying their taxes and homeowners insurance right in with their mortgage payment.

Do I have to pay my homeowners insurance through escrow?

In many cases, the borrower cannot decide whether to use an escrow account to pay the homeowners insurance premiums. Those homebuyers who make a down payment of less than 20 percent of the purchase price are typically required to have an escrow account. 

It is difficult to find a lender who will offer mortgages without escrow when the down payment is minimal. Almost all lenders try to make sure their loans are covered when the loan-to-value ratio climbs above eighty percent.

Should you have a homeowners insurance escrow account even if it is not required?

If you fall into a mortgage category that does not require escrow, you might be wondering if it still makes sense to have your homeowners insurance paid through the mortgage. Declining the escrow account and paying your own home insurance premiums – in addition to your taxes – might not be the right decision. 

Some lenders that do not require escrow accounts may charge a higher interest rate on the mortgage loan. You might even earn some interest on the money in the escrow account (15 states require lenders to return some of the interest they earn on your money).

Also, consider the peace of mind you will get knowing that you pay the escrow amount each month, and the lender takes care of the rest.

Will I lose my discounts if I escrow home insurance?

Some borrowers choose to pay their home insurance premiums directly instead of through escrow.  They believe that if they pay through an escrow account, they will lose the discounts for multiple or bundled policies. 

This assumption is usually not accurate. Even though the lender is paying the premiums, the borrower’s name is still on the policy, and that is all that most insurers require for the discount.

Any other questions on how homeowners insurance works during escrow?

Talk to an NSI Insurance Group professional today and get the expert advice that you deserve. Fill out our contact form, call us at 305-556-1488, or send us a message at info@nsigroup.org.

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