You have numerous annual expenses as a homeowner, some of which you may not always remember to budget for. However, a homeowners insurance escrow account is designed so you can avoid any delays in payment when the annual bill for homeowners insurance comes due. Homeowners in some states may not realize that it may be required to use an escrow account if they have a lender, although the option may be left up to the homeowner in other states. If it is your choice, understanding why an escrow account is established and the pros and cons to having one could help you decide if these types of accounts are beneficial for your financial situation.
What is a homeowners insurance escrow account?
A homeowners insurance escrow account is a separate bank account your mortgage lender maintains. The account is specifically designed to house money you set aside each month to pay for several key mortgage items, including homeowners insurance. Then, when the lump sum for your homeowners insurance bill is due, the amount is withdrawn from this separate bank account.
The escrow account can also be used for property taxes and mortgage insurance, in addition to homeowners insurance. When you make a payment each month to your mortgage lender, it typically includes both your mortgage and your escrow account payment. Then, depending on how your account is set up, your mortgage lender makes the payment on your behalf when the lump sum is due.
How does an escrow account pay for homeowners insurance?
Before closing on a home, you will want to verify if your lender is required to set up an escrow on your behalf or if you have the option to handle it yourself. If your lender is responsible for setting up the escrow account, you will need to pay attention to any documents related to escrow during the closing process. Once the lender or bank sets up the escrow account, you will pay towards it each month when you make your mortgage payment.
Homeowners insurance premiums are quoted for one year. Because the lender requires you to carry insurance for your property, the escrow account is established to ensure the payment is made. The amount you are quoted for annually is divided up into 12 equal payments, which is the amount established for monthly payments. When you close on your property, the first year of premiums is typically included in the closing costs.
For example, if your homeowners insurance premiums are $1,000 annually, the payment will be $83 per month and added into the escrow account. Keep in mind that while your homeowners insurance premium could increase or decrease, it may not change your total monthly payment each month. It is possible your …….