What Is Homeowners' Insurance Escrow And How Does It Work?

When you buy your home, you may pay your homeowners' insurance with an escrow account. Doing so may provide you with added convenience and some benefits. However, some people may not need it or choose not to pay this way. Here is more to know about how homeowners' insurance escrow works and its benefits.

What Is Homeowners' Insurance Escrow?

Homeowners' insurance escrow is when you use an independent escrow company to make insurance payments on your behalf. Most homeowners deal with an escrow company when they first purchase a home and set up a mortgage. Many banks require you to continue using an escrow company to handle your home expenses until you pay off your mortgage. However, you will not need an escrow company if you meet certain requirements.

How Does Homeowners' Insurance Escrow Work?

First, you set up and fund an escrow account. Your lender estimates your insurance, fees, interest, and taxes at the beginning of the year. They divide the total into twelve payments. Each month, they take out the required amount from your escrow account and pays those bills.

Many people prefer this method rather than paying one large sum for fees, insurance, and taxes each year. You won't need to worry about tax or insurance due dates that fall on different days of the year. If your insurance company overestimates your payments, then the money is refunded back into the account. You may also receive lower payments next year.

Who Needs Homeowners' Insurance Escrow?

Many lenders require anyone with a mortgage to use an escrow service to cover their insurance. However, some lenders waive this requirement if you have already paid 10 to 20 percent in a down payment. The lender may also waive the requirements under other circumstances. You will then be responsible for all the taxes, insurance, and fees on your own. Plus, some lenders charge a higher interest if you don't use escrow.

What are the Drawbacks of Homeowners' Insurance Escrow?

Some people don't like that they make an even monthly payment each month for annual costs. They feel that they could better invest the money the rest of the year and pay a lump sum. Other people may have concerns about the lender skipping payments or paying late. The latter reason is uncommon and usually resolvable.

Homeowners' insurance escrow doesn't limit your choice of insurance companies. Most banks and escrow companies allow you to choose any insurance you like. In many cases, you still get insurance discounts. If you want to know more about home insurance, talk to an insurance agent before you sign your loan documents.