Homeowners insurance escrow explained

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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 Then, when the lump sum for your homeowners insurance bill is due, the amount is withdrawn from this separate bank account.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 taxes or mortgage payments could also change, which might offset any changes to your homeowners insurance premiums.

Pros and cons of paying homeowners insurance with an escrow account

There are a few upsides and potential downsides of paying your homeowners insurance with an escrow account. While some homeowners like knowing the annual bill can be taken care of without much hassle, other homeowners might want to take on the responsibility of making annual payments themselves.

Pros Cons
When the homeowners insurance bill is due, the money should already be set aside to cover it as long as you have kept up on payments. There is a larger upfront payment with closing costs, since you are generally required to prepay homeowners insurance.
Because your mortgage lender handles the payment for you, it’s one less task to remember. You potentially miss out on short-term investment opportunities by not saving the money in your own account.
Some states allow you to earn interest from the escrow account. There are higher monthly mortgage payments with no option to alter the payment if your budget is tight that month.
Homeowners insurance becomes an automatic payment with no surprises when the bill is due.

Keep in mind, the type of loan you have and the state you live in may require you to have an escrow account. However, if you have a choice, you should consider if the pros outweigh the cons for you and if you are disciplined enough to set aside the money for the annual payment or monthly payments yourself. Some homeowners prefer to keep the money in their own account so they can control how the money is saved or invested.

Should you keep your home insurance after paying off your mortgage?

Once your mortgage is paid off, you will face the question of whether you should maintain a homeowners insurance policy since homeowners insurance is not a legal requirement. Before giving up the policy, remember that homeowners insurance can help you avoid financially devastating out-of-pocket costs should your property be damaged or destroyed by a covered loss.

Your property is likely to be your most valuable asset and homeowners insurance can help you financially protect it when covered damage or loss occurs to the structure. Additionally, it also covers your personal belongings inside your property. If someone gets hurt while on your property, you will have peace of mind knowing the personal liability coverage from your policy can help pay for their medical expenses and help you defend yourself in court if needed. Some of the expenses associated with medical bills or repairs to the home can be quite costly. A proper homeowners insurance policy could help keep your out-of-pocket costs to a minimum and keep you from facing exceptionally large medical or construction costs. Plenty of affordable home insurance companies are also available.

Frequently asked questions

What is the best home insurance company?

To determine the best home insurance company, you should focus on your individual needs and what ranks as most important to you. When evaluating homeowners insurance companies, you may find it helpful to compare coverage options, discounts, third-party ratings and reviews, as well as the digital experience of a carrier. Bankrate has evaluated these same categories, including sample premium rates, and found that Erie, Lemonade, State Farm and USAA are a few examples of standout carriers.

What happens if home insurance premiums aren’t paid on time?

Your mortgage lender is obligated to make timely payments for homeowners insurance premiums and any other type of expenses being held in escrow. Occasionally, mistakes happen and a lender may not make a premium payment on time. If a lender is late, you should first contact them immediately.

Most likely the issue can be resolved through a simple phone call. However, you should also send a notice in writing to the lender. A follow-up to the insurance carrier is in order too, to ensure the proper payment has been made after notifying them.

Can I remove homeowners insurance from an escrow account?

Once you have established a homeowners insurance escrow account, it may be difficult to have it removed, but not impossible. Each mortgage lender may have different rules and requirements for cancelling an escrow account, such as requiring the mortgage to be at least a year old. If you do want to cancel, you should contact the mortgage company to find out the exact process required. You should also confirm whether you live in a state where you are required to have an escrow account established by the lender.

Written by
Sara Coleman
Insurance Contributor
Sara Coleman has three years of experience in writing for insurance domains such as Bankrate, The Simple Dollar, Reviews.com, Coverage.com and numerous other personal finance sites. She writes about insurance products such as auto, homeowners, renters and disability.
Edited by
Insurance Editor