How does escrow and homeowners insurance work?

When you close on your home, the lender will often set up an escrow account to deposit part of your monthly loan payment to cover the cost of your real estate taxes, insurance premium, and private mortgage insurance. Other monthly expenses, such as a Homeowners Association fee, may also be included in the escrow account. At closing, most lenders will require you to pay the first term of your homeowners insurance or roughly 10% to 20% of your annual premium. These funds are deposited in your escrow account.

An escrow account helps ensure that expenses such as your homeowners insurance premiums and real estate taxes are paid on time. Your mortgage lender will deposit the escrow amount in the account each month and then pay your insurance bill, real estate taxes, and, if necessary, your private mortgage insurance bill when they are due.

An escrow account helps ensure that your homeowners insurance premiums and real estate taxes are paid on time.

Common escrow insurance myths

Here are a few common myths regarding escrow accounts and homeowners insurance:

  • Shopping for new homeowners insurance will impact my escrow account. This is simply not true. Shopping for a new home insurance policy will have no impact on your escrow home insurance account. Your current insurer and mortgage company won't be notified — or even be aware – that you're looking for a new insurance policy.
  • Switching insurers is too complicated. Once you've found a new policy, you may be concerned that switching to the new insurer will require countless phone calls and stacks of paperwork. Many companies make the new process simple. For example, your new insurance company will handle the switch for you and send the bill and proof of insurance to your lender. If, for some reason, your new insurer doesn't handle the switch for you, send your lender written notice that you canceled your old policy, along with the declarations page from your new policy. Your lender should take it from there.
  • Switching insurers will require a lot of paperwork. While you won't need to do a ton of paperwork, there will be a little work involved. In most cases, you'll need to cancel your existing home insurance policy. If you receive a refund check from your previous insurer, you may need to send that amount to your mortgage lender, and they'll deposit it in your escrow account. If you fail to do this, your escrow account may be underfunded.

Do I have to pay homeowners insurance through escrow?

If you have a down payment that's less than 20%, your lender will likely require you to pay your homeowners insurance through an escrow account. This ensures your insurance premium will be paid on time every month with no lapse in coverage. It also helps protect the lender's investment in your home.

If I refinance, do I have to switch insurance companies?

In most cases, you should be able to keep your current homeowners insurance. Your lender will add your insurance premium to your new escrow account and continue paying for your insurance. Your new lender may require different coverage levels, so you may have to add more coverage to your current policy.

If you're refinancing, it may be a good time to shop your insurance coverage as well; you may be able to save some money by switching insurance companies at the same time.

Is home insurance cheaper in escrow?

An escrow account is simply a bank account into which money is deposited to cover specific bills for your home, such as homeowners insurance, private mortgage insurance, and real estate taxes. An escrow account has no impact on your premium, so it doesn't make home insurance cheaper or more expensive.

The best way to lower your homeowners insurance cost is to shop your coverage. Insurers rate risk differently, which may result in dramatic differences in premium quotes.

Should you escrow real estate taxes and insurance?

In many cases, you won't have a choice. If you have less than 20% for a down payment or are a first-time homebuyer, there's a good chance your lender will require an escrow account.

It's possible that if you put down at least 20% and have a history of paying your mortgage on time, your lender will allow you to forgo an escrow account. However, note that an escrow account may be an advantage; it's convenient to write one check a month to your lender and let them disperse it to the taxing authority and insurance company instead of writing numerous checks each month.

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