Professional tips on understanding your escrow account and homeowners insurance.
You are required to have homeowner’s insurance when you have a mortgage, but most likely you will not be paying your insurance agent for this policy. Well, at least not directly. So how does that coverage get paid for?
If you find yourself asking this question that means your insurance is set up through an Escrow Account.
What is an escrow?
Wikipedia defines it as an account separate from the mortgage account where deposit of funds occurs for payment of certain conditions that apply to the mortgage, usually property tax and insurance. ( https://en.wikipedia.org/wiki/Escrow ).
Again, what? Did anyone understand that?
You will need to talk to a mortgage expert to get it explained to you as a whole, but….
I do know how your escrow account and homeowners insurance works
When you close on your home, part of your closing costs are to pay for homeowner’s insurance. Shortly after closing your insurance company will get a check from the title company to pay for your first year’s insurance premium.
Boom, the insurance has been paid, and you didn’t have to make the payment directly.
What about renewal?
This is where the escrow account comes in. Generally speaking, each month as you pay your mortgage payment a portion of that is going into your escrow account to pay for insurance. As months go on the money in your escrow account accumulates. A year after your closing and the new insurance was set up, your home insurance will be up for renewal and thus another payment will be needed.
Guess what though, you will not be receiving this bill.
Instead your mortgage company will be billed. They will pay the new premium from the money that has been adding up in your escrow account. Once again your insurance was paid and you didn’t pay directly to the insurance company. This repeats itself year after year until you pay off your home or close your escrow account.
A couple of important items to note:
- If your home insurance goes up or down your mortgage company may adjust your monthly mortgage payments to collect a different amount for your escrow account.
- If your loan gets sold or sent to a different mortgage company to service it, make sure you let your homeowners insurance agent know so that the right mortgage company gets billed each year.
For more expert advice on insurance for first time home buyers give us a call, or you can request a quote here.