What Is Insured Escrow?

What is homeowners insurance escrow? How does homeowners insurance escrow work? How to set up an escrow payment.

4 min read
By Prerna
Insured Escrow
Photo by Rowan Heuvel / Unsplash

You and your lender are protected when you pay your homeowner's insurance through an escrow account. It has various advantages, including guaranteeing that your insurance premiums are delivered on time and in full each year, preventing your coverage from expiring.

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Escrow accounts are vital to understanding when purchasing a home because the charge must be funded upfront. Even after you've moved into your new house, understanding how escrow works will come in handy when managing and maybe changing your homeowner's insurance policy.

What is homeowners insurance escrow?

If you've ever questioned "what is insurance escrow," it's a third-party-managed account. When you buy a house, you'll open an escrow home insurance account, which will result in several expenses that aren't owing to your lender but must be paid to maintain your house up to date. This includes payments that will be applied to your property taxes, homeowner's association dues (if applicable), and homeowner's insurance premium.

You'll almost certainly have an escrow account to help you keep track of these payments for the duration of your mortgage. It's in the lender's best interest for you to keep your homeowner's insurance up to date to be compensated in the case of a significant loss.

How does homeowners insurance escrow work?

Typically, your mortgage lender will set up an escrow account for you. Rather than making one-time contributions to that account to cover expenses such as homeowner's insurance and property taxes, your lender divides the sum into 12 monthly instalments. That amount then increases your monthly mortgage payment.

Assume your monthly homeowner's insurance premium is $1,000 and your annual county property tax is $2,500; your total yearly cost is $3,500. Your lender adds an extra $292 to your mortgage payment and then handles the prices to ensure you have enough money to pay those two crucial expenses. The acronym "PITI" stands for principal, interest, taxes, and insurance, and it accounts for the majority — if not all — of your monthly payment.

Your homeowner's insurance premium may change over time, resulting in a change in the amount you contribute to your escrow account. You might not have to spend as much if your premium reduces. However, if it rises, you'll have to put more money into your escrow account every month. However, not all lenders set up escrow accounts and make insurance payments on your behalf, so make sure you know what you're responsible for before signing a contract.

How to set up an escrow payment

If your lender manages the escrow account on your behalf, your involvement is limited. In most circumstances, starting on closing day, the mortgage provider will take care of it throughout the term of your loan. Pay close attention to any loan documentation you get at closing and in the following days. Some lenders immediately sell your mortgage to service, and you'll receive a letter with new payment instructions in the mail. This can be perplexing, but it isn't unusual. If you're creating your escrow account, expect to go through the following steps:

  • Choose a financial institution.
  • Make monthly deposits based on your annual premium.
  • Setup automatic drafts with your homeowner's insurance company based on your due date.

Do I have to pay homeowners insurance through escrow?

The type of house loan you get and the quantity of your down payment will determine whether or not you need to use an escrow account. To avoid escrow on a traditional loan, you'll typically need at least a 20% down payment. You'll need a minimum 10% down payment and a good credit score to opt-out of a VA loan. FHA loans are the most stringent, requiring you to use an escrow account for all taxes and insurance.

Of course, you won't need an escrow account if you pay cash for your property or finish paying off your mortgage. However, you will remain liable for property taxes and should maintain homeowners insurance coverage. Even if you don't have a mortgage, it can help you avoid financial difficulty in the event of damage.

How to change homeowners insurance with escrow

Changing your homeowner's insurance using an escrow account is simple, whether towards the end of your coverage or halfway through it. Inform the new insurer which your mortgage servicer is and provide any essential information once you've switched to a new policy and cancelled your old one. Any due payments will be made immediately from your escrow account by your mortgage agency.

Because you pay your annual premium for the next year in advance, you may receive a refund check straight from the insurer if you cancel your previous insurance early. The price will be prorated based on how many months remain on your insurance that has not been used.

Your mortgage servicer should pay the new firm immediately based on your escrow funds. If you don't have enough cash in your account, you may have to pay a lump sum or have a fee applied to your monthly mortgage payment. Finally, your mortgage payment may alter depending on whether your new premium is larger or cheaper than the prior one.

The takeaway

  • An escrow account is set up to manage homeowners insurance payments on your behalf.
  • Only certain mortgages require an escrow account.
  • It's easy to change homeowners insurance even with an escrow account.

Conclusion

An escrow account is an excellent way to keep track of your annual homeowner's insurance premiums. While changes in your premium may affect your monthly mortgage payment, you are in charge of selecting the most significant coverage at the best price. Your escrow account will handle ongoing payments once you choose a supplier and pay any upfront expenses.