How Does Escrow and Homeowners Insurance Work?
Find out how homeowners insurance can be paid for using an escrow account and why it matters.
Written by
Christine Lacagnina has written thousands of insurance-based articles for TrustedChoice.com by authoring consumable, understandable content.
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Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career. He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.
If you're a homebuyer who's wondering how escrow and homeowners insurance works, you're not alone. Many folks have questions about home insurance that must be paid through escrow. An escrow insurance account is just one payment strategy option, but it can be convenient and helpful for many homebuyers.
An independent insurance agent can help you get set up with all the homeowners insurance you need for your new home, and can also answer any questions you have about making payments through an escrow. But for starters, here's a breakdown of how escrow and homeowners insurance work.
What Is an Escrow Account?
An escrow account is used to make sure buyers and sellers follow the rules agreed upon in a transaction. It's created and administered by a neutral third party. The buyer deposits funds into the escrow account and the funds are released when the terms of the transaction are fulfilled.
For example, when a home is sold and purchased, a title company will often oversee the transaction, holding funds and arranging for the transfer of the property. The account that holds funds is called an escrow account. The process of completing the transaction (i.e., a lot of paperwork) is known as the "closing" of it. Lenders often use escrow accounts to make sure that insurance premiums and property tax payments required by the mortgage agreement are paid in full and on time.
How Does Escrow and Homeowners Insurance Work?
Homeowners insurance premiums are often paid from a lender’s escrow account. Part of the monthly payment made to the lender includes money to be deposited into the account. The process can be confusing, especially for first-time home buyers.
Stacy Lomonaco, a senior mortgage loan officer at Community Lending in Ft. Myers, FL said, “We will require homeowners insurance covering the loan amount and if the property is located in a flood zone, then flood insurance will be required as well. We look at the FEMA flood map to see if it will be required. In a lot of cases, we will escrow the annual insurance premium for the client and pay it when their bill is due. Each month, part of their payment (i.e., PITI-principal, interest, taxes, and insurance) is set aside for this purpose.”
Lomonaco added that homeowners insurance is a requirement for obtaining a loan. Working together with an independent insurance agent can help you find the right kind of policy for your new home and your personal needs. After securing proof of coverage, you can apply for a home loan.
What if My Home Insurance Premium Changes?
Lenders typically review the escrow account each year to make sure the funds are adequate. The home insurance company notifies you and the lender well in advance of any premium changes. If necessary, you'll be asked to deposit additional funds each month. Also, if you decide to change insurance companies, you'll need to notify the lender. Your independent insurance agent can help you shop around and make the proper notifications.
Can I Pay My Homeowners Insurance outside of Escrow?
Some lenders may permit direct payment of homeowners insurance if the down payment is 20% or more. Remember, there will still be an obligation to maintain the insurance, and the lender will be notified if you fail to pay the premium, possibly resulting in penalties.
The lender may also charge more in interest and fees if you pay the premium directly. Paying homeowners insurance through the lender’s escrow account is a convenient way to make sure that you protect your valuable home.
Why Would I Want to Pay My Home Insurance through Escrow?
There are some conveniences to having your home insurance paid through an escrow account, though this option isn't right for everyone. Here are just a couple of reasons you might want to pay your home insurance through escrow:
- Convenience: With an escrow, you can pay not only your mortgage automatically, but your home insurance and property taxes, too.
- No missed payments: Thanks to the automatic payments from an escrow account, you'll be assured that you'll never miss a mortgage or home insurance payment, as long as you keep money in the account.
An independent insurance agent can provide even more reasons why you might want to make your home insurance premium payments through escrow.
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What Are the Benefits of Working with an Independent Insurance Agent?
If you're planning to buy a home in the near future, speak with an independent insurance agent before you start shopping. They can help you assess your home insurance coverage needs and can use their relationships with several different insurance companies to find you a suitable policy at a competitive rate.
Your independent insurance agent can even find ways to save you money on your other insurance policies. Find a local independent agent in your neighborhood today who can provide the details you need to make an informed choice about home insurance.
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